econch6

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MONOPOLY DEMAND

1 2 3 4 5 6

P

Q

$142132

D

As price decreases from

$142 to $132...

Loss = $30

Gain = $132

but revenue willincrease with the

additionalunit sold

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MONOPOLY DEMAND

1 2 3 4 5 6

P

Q

$142132

D

As price decreases from

$142 to $132...

Loss = $30

Gain = $132

but revenue willincrease with the

additionalunit sold

Marginal Revenue

$142 - $30 =$102will necessarily be

less than price $132

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MONOPOLY REVENUES & COSTS

Dollar

s

Dollars

$200

150

200

50

$750

500

250

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Q0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Q

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Dollar

s

Dollars

$200

150

200

50

$750

500

250

MR

Elastic

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

D Q0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

TR

Q

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Q

Dollar

s

Dollars

$200

150

200

50

$750

500

250

TR

MRD

InelasticElastic

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18Q

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

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Profit Maximization Under Monopoly

D

MC

ATC

MR

$94

$122Profit

MR = MC

ProfitPer Unit

OUTPUT AND PRICE DETERMINATION

Q

200

175

150

125

100

75

50

25

0 1 2 3 4 5 6 7 8 9 10

Price,costs,and

revenue

Remember the MR=MC Rule?

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Profit Maximization Under Monopoly

D

MC

ATC

MR

$94

$122Profit

MR = MC

ProfitPer Unit


Q

200

175

150

125

100

75

50

25

0 1 2 3 4 5 6 7 8 9 10

Price,costs,and

revenue

What AboutLoss Minimization?

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Loss Minimization Under Monopoly

D

MCATC

MR

APmLoss

MR = MC

LossPer Unit


Q

200

175

150

125

100

75

50

25

0 1 2 3 4 5 6 7 8 9 10

Price,costs,and

revenue

AVC

Qm

V

SincePmexceedsAVC,the firm will produce

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Loss Minimization Under Monopoly

D

MCATC

MR

APmLoss

MR = MC

LossPer Unit


Q

200

175

150

125

100

75

50

25

0 1 2 3 4 5 6 7 8 9 10

Price,costs,and

revenue

AVC

Qm

V

What are theEconomic Effects

of Monopoly?

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Q

INEFFICIENCY OF PURE MONOPOLY

P

D

MR

S = MC

Pc

Pm

QcQm

At MR=MCA monopolistwill sell less

units at ahigher pricethan in

competition

An industry in pure competitionsells where supply and

demand are equal

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Q

INEFFICIENCY OF PURE MONOPOLY

P

D

MR

S = MC

Pc

Pm

QcQm

At MR=MCA monopolistwill sell less

units at ahigher pricethan in

competition

Monopoly pricing effectively

creates an income transfer from

buyers to the seller!

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(1)

(2)

(1)

(2)

(3)

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Q

DMR

MC

ATC

P

Q1

P

riceand

Costs

Economic profits with

a single MR=MCprice

PRICE DISCRIMINATION

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Q

D

MC

ATC

P

Q1

P

riceand

Costs


Q2

A perfectly discriminatingmonopolist has MR=D,

producing more productand more profit!

MR=D

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Q

D

MC

ATC

P

Q1

P

riceand

Costs

Economic profits with

price discrimination


Q2

MR=D

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D

MR

P1

ATC

Priceand

Costs

Q1

Economic

Profits

Expect New Competitors

PRICE AND OUTPUT IN

MONOPOLISTIC COMPETITION

Quantity

A1

MC

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D

MR

P1

ATC

Priceand

Co

sts

Q1

Economic

Profits

Expect New Competitors

PRICE AND OUTPUT IN


Quantity

A1

New competition drives down the

price level

leading to economiclosses in the short run

MC

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D

MR

MC

P2

ATC

Priceand

Co

sts

Q2

EconomicLosses

PRICE AND OUTPUT IN


Quantity

A2

C A O

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D

MR

MC

P2

ATC

Priceand

Co

sts

Q2

EconomicLosses

PRICE AND OUTPUT IN


Quantity

A2With economic losses, firms will

exit the market

Stability occurswhen economic profits are zero

PRICE AND OUTPUT IN

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D

MR

MC

P3

= A3

ATC

Priceand

Co

sts

Q3

PRICE AND OUTPUT IN


Quantity

Long-Run EquilibriumNormalProfitOnly

O O O S C CO O

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D

MR

MC

P3

= A3

ATC

Priceand

Co

sts

Q3Quantity

Long-Run EquilibriumPrice is Not= Minimum

ATC

Price MC


AND EFFICIENCY

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OLIGOPOLY BEHAVIORA Game-Theory Overview

High

Low

High Low

Uptowns

PriceStrategy

RareAirs Price Strategy

BA

DC

$12 $15

$12 $6

$6 $8

$8$15
http://www.mhhe.com/cgi-bin/mcbrue15.pl?url=origin25-2

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High

Low

High Low

Uptowns

PriceStrategy


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

Greatest

CombinedProfit

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High

Low

High Low

Uptowns

PriceStrategy


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

Independent

ActionsStimulateResponse

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High

Low

High Low

Uptowns

PriceStrategy


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

Independent

ActionsStimulateResponse

Gravitatingto theWorst Case

O GO O A O

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High

Low

High Low

Uptowns

PriceStrategy


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

CollusionInvites a

DifferentSolution

OLIGOPOLY BEHAVIOR

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High

Low

High Low

Uptowns

PriceStrategy


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

CollusionInvites a

DifferentSolution

OLIGOPOLY BEHAVIOR

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High

Low

High Low

Uptowns

PriceStrategy


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

But, theincentiveto cheatis very

real

CollusionInvites a

DifferentSolution

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KINKED DEMAND THEORY:

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D1

MR1Quantity

The firms demand andmarginal revenue curves

KINKED DEMAND THEORY:NONCOLLUSIVE OLIGOPOLY

Price


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MR2D1

D2

MR1Quantity

The rivals demand andmarginal revenue curves


Price


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MR2D1

D2

MR1Quantity


Price

Rivals tend tofollow a price cut


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MR2D1

D2

MR1Quantity


Price

Rivals tend tofollow a price cut

or ignore aprice increase


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MR2D1

D2

MR1Quantity

Effectively creatinga kinked demand curve


Price


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D

Quantity



Price


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D

MRQuantity



Price

MC2

MC1


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D

MRQuantity

Profit maximizationMR = MC occurs

at the kink


Price

MC2

MC1


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D

MRQuantity

This behavior can setoff a price war


Price

MC2

MC1

CARTELS AND OTHER COLLUSION

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Colluding Oligopolists Will

Split the Monopoly Profits

D

MC

ATC

MR

EconomicProfit

MR = MC

Priceandc

osts

Q0

P0

A0

CARTELS AND OTHER COLLUSION

Documents

econch6