ECONOMICS FOR MANAGERS

BA533
MODULE 5: Single-Price
Monopoly

“Seeking Perfect Prices, CEO Tears Up the Rules”

“U.S. Judge Says Microsoft Violated Antitrust Laws…”

“Microsoft Defeat in Europe Court Rewrites Rules”

Fall 2017 Economics for Managers: Module 5 1

 Topics...
Price Setter
Marginal Revenue
Monopoly Deadweight Loss
Major Antitrust Statutes

Fall 2017 Economics for Managers: Module 5 2

 Module 5 Assignments
Background reading from P&R listed in
the syllabus
Practice Problems 28 - 32
Study Guide:

Chapter 10 Problems:
1 - 4, 10, 16, 23, 24, 27, 29 – 32, 34

Fall 2017 Economics for Managers: Module 5 3

 Monopoly

A market with a single seller and

lots of buyers

Fall 2017 Economics for Managers: Module 5 4

 Monopoly
The firm is a price maker, not a price taker.
MR Total costs

max rule:
MR = MC

MC
Total Revenues

= TR - TC

max Q
Fall 2017 Economics for Managers: Module 5 5
 What is Marginal Revenue?
It’s the change in Total Revenue from a
one-unit increase in output
Using calculus,

MR dTR = d(pq) = p + qp’

dq dq

Since p’ < 0, we have MR < p

Fall 2017 Economics for Managers: Module 5 6

 Marginal Revenue
To sell more, the monopolist must reduce
the price charged.
The price of Lost revenues from
Marginal reducing the price on
= the last unit -
Revenue all the previous units
sold
sold

MR < P

For a competitive firm, MR is the Price !

Fall 2017 Economics for Managers: Module 5 7
 Marginal Revenue: A Shortcut
With Linear Demand, the MR curve
has the same vertical intercept as demand
but twice the slope.
vertical intercept

X MR x D
2
Fall 2017 Economics for Managers: Module 5 8
 The Monopolist’s Decision
Redistribution from
MC consumers to firms
M
PM
C Deadweight loss
PC
to society

QM QC
MR D
Fall 2017 Economics for Managers: Module 5 9
 The Monopolist’s Decision
MC

M
PM ATC

QM
MR D
Fall 2017 Economics for Managers: Module 5 10
 The Monopoly Mark-Up

TR (PQ) = P Q + Q P
MR = =
Q Q Q

Q P }
= P+P {
P Q

= P+ P Demand
ED Elasticity
Fall 2017 Economics for Managers: Module 5 11
 The Monopoly Mark-up
Profit Maximization: MR = MC

P+ P = MC
ED
“Lerner Index”

- 1 = P - MC
ED P

More inelastic D larger markup

Fall 2017 Economics for Managers: Module 5 12

 The Monopoly Mark-up
MC
DE: Elastic Demand
lower mark-up

DI: Inelastic Demand

higher mark-up

MRI DI DE
MRE
Fall 2017 Economics for Managers: Module 5 13
 Antitrust in the US
The Sherman Antitrust Act (1890)
section 1: prohibits contracts, combinations
and conspiracies in restraint of trade
section 2: prohibits monopolization,attempts
to monopolize,and combinations or
conspiracies to monopolize
section 7: private persons injured by a
monopoly may sue for treble damages

Fall 2017 Economics for Managers: Module 5 14

 The Sherman Antitrust Act
Violations constitute a felony and are
punishable (as amended in 1974) by:
imprisonment up to 10 years
fines up to $1 million for individuals; $100
million for corporations
section 1 offenses are “Per-se Violations”
the act itself is illegal
there are no mitigating circumstances
an example: price fixing
Fall 2017 Economics for Managers: Module 5 15
 The Sherman Antitrust Act

Section 2 offenses are judged under the

“Rule of reason”
the court examines the facts on a case-by-
case basis to determine illegality
mitigating circumstances are considered
example: monopolization

Fall 2017 Economics for Managers: Module 5 16

 What is Required in Order to
be Guilty of Monopolization?
Attainment of a
100% is not required--
“near monopoly”
87% has been enough!
market share

+
A demonstrated Actions taken to
“intent to monopolize” establish market
dominance

Fall 2017 Economics for Managers: Module 5 17

 1911: Standard Oil’s “Intent to
Monopolize” was inferred from its
“Abusive Acts”:
“These included the securing of discriminatory
rail, freight rates, and rebates, foreclosing
supplies of crude oil through the control of
pipelines, business espionage, price warfare
waged both overtly and secretly through bogus
independent distributors, and (although never
proved) astute placement of an occasional
stick of dynamite.”

(F. M. Scherer, 1971)

Fall 2017 Economics for Managers: Module 5 18
How Does a Firm Defend Against
Charges of Monopolization?
Demonstrate that it doesn’t have a
monopolistic share of the economically
relevant market
Cross-elasticities of demand are critical--
the “reasonable interchangeability” test
Demonstrate that the market share
resulted either from a superior product
or historic accident

Fall 2017 Economics for Managers: Module 5 19

 The Microsoft
Monopolization Case

“Intent to Monopolize” is still the

key issue!

Fall 2017 Economics for Managers: Module 5 20

 Sequence of Events…
July 1994: Microsoft signs a “consent
decree” agreeing it will not “tie” products
September 1994: Netscape arrives
May 1995: Gates writes memo to employees
labeling Netscape to be a “threat”
June 1995: At a meeting, Microsoft threatens
Netscape and offers to split browser market
Spring 1996: Microsoft threatens to cancel
Compaq’s Windows license because Compaq
is promoting Netscape’s browser
Fall 2017 Economics for Managers: Module 5 21
 August 1996: Justice Dept. begins
investigation of Netscape’s allegations
regarding Microsoft’s behavior
December 1996: Microsoft exec’s memo
states “Windows integration is necessary
to win the browser war”

October 1997: Justice Dept. accuses

Microsoft of violating 1994 decree by
tying browser to Windows operating
system

Fall 2017 Economics for Managers: Module 5 22

 October 1998: Trial begins; Bill Gates
testifies, and among other things, claims he
cannot recall his company’s name (just
kidding…)
November 1999: Judge Thomas Penfield
Jackson issues “finding of fact” declaring
Microsoft to be a monopoly
April 2000: Judge Jackson finds Microsoft in
violation of antitrust law
June 2000: Judge Jackson approves breakup of
Microsoft into two companies
June 2001: Appeals court sends case back to
lower court to determine new remedy

Fall 2017 Economics for Managers: Module 5 23

 Microsoft vs. European Union
Bundling of Windows Media Player with Windows

March 2004: Microsoft fined €479m and ordered to produce a

version w/o Windows Media Player
December 2005: EU announces noncompliance, and fines
Microsoft €2m per day
September 2007: Microsoft loses appeal; total fines approach
€2 billion
October 2007: Microsoft decides not to appeal
February 2008: EU fines Microsoft additional €899m for failure
to comply with March 2004 ruling; Microsoft appeals
January 2009: EU begins investigation of bundling Internet
Explorer to Windows; Microsoft unbundles.
June 2012: General Court of the EU upholds 2008 fine but
reduces it to €860m
Fall 2017 Economics for Managers: Module 5 24