Monopoly and Monopolistic Competition
Monopoly and Monopolistic Competition
Monopoly and Monopolistic Competition
Competition
August 26th & 28th, 2019
PROF. Ashutosh Tripathi
Checklist
• Features of Monopoly
• Multi-plant firm
• Collusion I.
II.
III.
Managing a Monopoly
• Market power
permits you to price
above MC
• Is the sky the limit?
• No. How much you
sell depends on the
price you set!
A Monopolist’s Marginal
Revenue
P
TR Unit elastic
100
Elastic
Unit elastic
60 1200
Inelastic
40
20 800
0 10 20 30 40 50 Q 0 10 20 30 40 50 Q
MR
Elastic Inelastic
Monopoly Profit Maximization
Produce where MR = MC.
Charge the price on the demand curve that corresponds to that
quantity.
MC
$
Profit ATC
PM
ATC
QM Q
MR
Monopoly Power
• The Rule of Thumb for Pricing
MC
P
1 1 Ed
– Pricing for any firm with monopoly
power
• If Ed is large, markup is small
• If Ed is small, markup is large
Monopoly Power
• Monopoly is rare.
• However, a market with several firms,
each facing a downward sloping demand
curve will produce so that price exceeds
marginal cost.
• Measuring Monopoly Power
– In perfect competition: P = MR = MC
– Monopoly power: P > MC
Elasticity of Demand and Price
Markup
MC
P* MC
P*
AR
P*-MC
MR
AR
MR
Q* Quantity Q* Quantity
Sources of Monopoly
Power
• A firm’s monopoly power is
determined by the firm’s elasticity
of demand.
• The firm’s elasticity of demand is
determined by:
1) Elasticity of market demand
2) Number of firms
3) The nature of interaction among
firms
Long Run Adjustments?
• None, unless the
source of
monopoly power
is eliminated.
Why Government Dislikes
Monopoly?
• P > MC
– Too little output, at too high a
price.
• Deadweight loss of
monopoly.
Arguments for Monopoly
If Ed 2 P 2 MC
If MC increases to MC t
P 2( MC t ) 2 MC 2t
Price increases by twice the tax. Should the
monopolist then
lobby for more
taxes?
The Multi-plant Firm
• For many firms, production takes
place in two or more different plants
whose operating cost can differ.
– Choosing total output and the output for
each plant:
• The marginal cost in each plant should be
equal.
• The marginal cost should equal the marginal
revenue for each plant.
Production with Two Plants
$/Q
MC1 MC2
MCT
P*
MR* D = AR
MR
Q1 Q2 Q3 Quantity
The Social Costs of Monopoly
Power
MC
Deadweight
Loss
Pm
A
B
PC C
AR
MR
Qm QC Quantity
The Social Costs of Monopoly
Power
• Rent Seeking
– Firms may spend to gain monopoly power
through:
• Lobbying
• Advertising
• Building excess capacity
The Social Costs of Monopoly
Power
• Price Regulation
– Recall that in competitive markets, price
regulation created a deadweight loss.
• Question:
– What about a monopoly?
Price Regulation
If left alone, a monopolist
produces Qm and charges Pm.
Pm MC
P4
AR
Any price below P4 results
in the firm incurring a loss.
Qm Q3 Qc Q’3 Quantity
Regulating the Price
of a Natural Monopoly
Unregulated, the monopolist
would produce Qm and
$/Q
charge Pm.
AC
Pr
MC
PC
AR
MR
Qm Qr QC Quantity
Characteristics of
Monopolistic Competition
– Many firms
AC AC
PSR
PLR
DSR
DLR
MRSR
MRLR
P
PC
D = MR
DLR
MRLR