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9.1) Monopoly Markets�9.2) Monopoly vs. Competition�9.3) Rent Seeking and X-inefficiency�9.4) Price Discrimination�9.5) Regulation and Antitrust

Ch9. Monopoly

ECO 1002. Principles of Microeconomics

Week 10

Dr. Christopher Paik

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9.0) What is Monopoly?

Image: robertnyman.com

Google, the market value of the company in 2021 was $2 trillion (Walmart + McDonald's + Coca-Cola + AT&T)

Q. How can Google be worth so much if it doesn't sell any physical products?

A. Google sells advertising services to companies worldwide (e.g., Google charges over $50 every time someone clicks on their ad link where the average price is about $1)

Google has competitors such as Yahoo! and Bing, but Google dominates the market with 90% M/S of the search engine market

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9.1) Monopoly Markets

The market has just one seller - one firm is the industry

There are no close substitutes for the monopolist's product

There are significant barriers to entry

This gives pure monopolists (price makers) what economists call market power

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9.1) Monopoly Markets

What is monopoly?

Numbers of Sellers

Substitutes Availability

Entry Barrier

Market Power

Monopoly is a one-firm industry with substantial barriers to entry that produces a product for which there are no close substitutes

Economies of scale – natural monopoly Entry barriers

An industry exhibiting large economies of scale such that efficient production occurs when only one firm serves the market
Government franchises, patents, and copyrights (e.g., USPS, SDGE, Drugs, De Beers)

Perfect Competition

Monopolistic Competition

Oligopoly

Monopoly

Many seller

One seller

Many substitutes

No substitutes

No entry barrier

Significant entry barrier

Price takers

Price maker

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9.1) Monopoly Markets

Why MP < P for Monopoly?

The monopolist is the entire market

Downward-sloping demand curve

Numerical example: Selling 10 units - $180

Selling 11 units - $187

MR for the 11^th unit is $7

Q. How do monopolists maximize their profit?

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9.1) Monopoly Markets (from last class)

What is monopoly?

Numbers of Sellers

Substitutes Availability

Entry Barrier

Market Power

Monopoly is a one-firm industry with substantial barriers to entry that produces a product for which there are no close substitutes

Perfect Competition

Monopolistic Competition

Oligopoly

Monopoly

Many seller

One seller

Many substitutes

No substitutes

No entry barrier

Significant entry barrier

Price takers

Price maker

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9.1) Monopoly Markets (last class review)

MR curve comparison between perfect competition & monopoly

MR = $10

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9.1) Monopoly Markets (last class review)

MR curve comparison between perfect competition & monopoly

A firm is a price maker in monopoly
Another board marker example:

Let’s say your company is the only one company that produces board markers
The demand curve is one way to measure customers’ willingness to pay for a product

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15

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9.1) Monopoly Markets

Monopoly pricing and output decisions

Step 1) Find the point where MR = MC

Step 2) Drop down and find the q*

Step 3) Find the demand curve at the q*, and determine the price

Step 4) Find the ATC at the q*

Step 5) Determine the Profit

Max profit = TR – TC

= P x q* – ATC x q*

= q* x (P – ATC)

= 120 x ($30 – $22)

= $960

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9.1) In-Class Practice Question (Solution)

Monopoly pricing and output decisions

Profit

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9.2) Monopoly vs. Competition

Monopoly pricing and output decisions

Monopolies earn economic profit by producing less and charging more than competitive firms

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9.3) Rent Seeking

Monopolies earn economic profit by producing less and charging more than competitive firms

Rent seeking – behavior directed toward avoiding competition

Firms hire lawyers and other professionals to lobby governments
Extend patents (pharmaceutical industry)
Engage in a host of other activities intended solely to protect their monopoly position
E.g., Taxis in New York City require a medallion registered with the Taxi and Limousine Commission

Vector stock & Alamy images

Entry barrier

competitors

Monopolist

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9.3) X-Inefficiency

Monopolies earn economic profit by producing less and charging more than competitive firms

X-inefficiency

Society might lose from monopolies
Monopolies are protected from competitive pressures, they don’t have to operate efficiently
E.g., Spending on luxury corporate jets, lavish travel, and other nonessential perks

Clipart & CanStock Photo images

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9.4) Price Discrimination

When firms have market power, they charge different customers different prices for the same product

Perfect (first-degree) price discrimination

Charges each customer the maximum price each is willing to pay
Extract all consumer surplus
E.g., online auction

$10

$15

$5

$7

$3

$6

$2

Ice cream?

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9.4) Price Discrimination

When firms have market power, they charge different customers different prices for the same product

Perfect (first-degree) price discrimination

Charges each customer the maximum price each is willing to pay
Extract all consumer surplus
E.g., online auction

Second-degree price discrimination

Charges different prices for different blocks (range) of consumption
E.g., block pricing from electric, gas, and water utilities

Third-degree price discrimination

Charges different groups of people different prices
To increase producer surplus by serving more customers
E.g., airline fares for business and coach, software discount for students

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9.5) Regulation and Antitrust

To mitigate the maximum market power of monopolies, government uses regulation and antitrust

Regulating the natural monopolist

A natural monopoly exists when economies of scale are large
Q. How can we prevent natural monopolists from abusing their market power?

They can be publicly owned
Put price and quantity constraints

Marginal cost pricing rule
Average cost pricing rule
Allow the operation if the firm provides the most competitive price and quantity conditions

Regulation in practice

E.g., Public utility regulation
Rate of return regulation

Antitrust policy (law)

To preserve competition
Tools to measure market power

Concentration ratios
Herfindahl-Hirschman index

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9.5.1) Antitrust Policy

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9.5.2) Defining the Relevant Market and Market Power

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