This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

1
Chapter 4 Organization

• Basic Monopoly Model
• Profit Maximization
• Efficiency
• Dominant Firms
• Monopsony

2
Single Price Monopoly

• Assumptions
• Single Good
• One firm with no threat of entry
• Charges the same price for all units of the
  product
• Maximizes Profit

3
Graphing Profit Maximization

• Inverse Demand Curve P 100 2Q
• Cost 25 10q q2

TR, Profit
Price
1375
1250
1000
875
750
625
500
375
250
125
q
q
0
4
Calculations

• Inverse Demand Curve P 100 2Q
• Cost 25 10q q2

5
Calculations

• Inverse Demand Curve P 100 2Q
• Cost 25 10q q2

6
Calculations

• Inverse Demand Curve P 100 2Q
• Cost 25 10q q2

7
Monopoly Profit, Deadweight Loss

• Inverse Demand Curve P 100 Q
• Cost 50q

P
100
75
MC
50
Q
25
100
50
MR
8
Calculations

• Inverse Demand Curve P 100 Q
• Cost 50q

9
Monopoly Markup
10
Incentives for Efficient Operation

• X-inefficiency
• Rent-seeking
• Deadweight Loss and Elasticity
• Benefit of a monopoly
• Economies of scale
• Network effects
• Patents and technological development

11
Creating and Maintaining Monopoly

• Knowledge advantage
• Controlling a key ingredient
• Government
• Natural Monopoly
• Strategic Devices
• Incumbent Reactions
• Specific Assets
• Scale Economies
• Reputation Effects
• Excess Capacity
• Incumbent Advantages
• Pre-commitment Contracts
• Licenses and Patents
• Learning-Curve Effects
• Pioneering Brand Advantages

12
Profit and monopoly

• Is any firm that earns a profit a monopoly?
• Does a monopoly always earn a positive profit?

13
Can a monopoly have profit lt0?

• Inverse Demand Curve P 100 Q
• Cost 50q

P
100
75
MC
50
Q
25
100
50
MR
14
Dominant Firm with a Competitive Fringe

• Why are some firms dominant?
• Efficiency
• Patents
• Early Entry
• Government Favoritism
• Network Effects

15
The No-Entry Model

• Assumptions
• The large firm has lower production costs than
  the other firms
• All firms, except the dominant firm, are price
  takers.
• The dominant firm knows the demand curve
• The dominant firm can predict how much the fringe
  will produce at any price.

16
Figure 4.6 Dominant Firm Fringe
Supply from the Fringe, S(p)
/q
/q
Demand, D(p)
Demand, D(p)
q
Q
Monopoly MR
17
Example

• Inverse market demand P 1000-Q
• Inverse Fringe Supply P 700 Qf

18
Example

• Inverse market demand P 1000-Q
• Inverse Fringe Supply P 700 Qf

19
Figure 4.6 Dominant Firm Fringe
Supply from the Fringe, S(p)
/q
/q
Demand, D(p)
Demand, D(p)
q
Q
Monopoly MR
20
Figure 4.6 Dominant Firm Fringe
Supply from the Fringe, S(p)
/q
/q
MR Dominant Firm
Demand, D(p)
Demand, D(p)
q
Q
Monopoly MR
21
Figure 4.6 Dominant Firm Fringe
Supply from the Fringe, S(p)
/q
/q
MR Dominant Firm
Demand, D(p)
Demand, D(p)
q
Q
22
Monoposony

• Single buyer
• Sellers are price takers

23
Monopsony

• Marginal Revenue Product of Labor 100 L

W
Supply W L
100
MRPL 100 - L
L
25
50
100
24
Monopsony Workspace
25
Monopsony Workspace