As price decreases from $142 to $132...

but revenue will $142 Loss = $30 increase with the 132 additional unit sold D
Gain = $132

MONOPOLY DEMAND

As price decreases from $142 to $132... but revenue will $142 Loss = $30 increase with the 132 additional unit sold

MONOPOLY DEMAND

Marginal Revenue Gain = $132 $142 - $30 = $102 will necessarily be less than price $132
1 2 3 4 5 6

MONOPOLY REVENUES & COSTS

$200

Dollars

150

200 50
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

$750

Dollars

500

250

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

MONOPOLY REVENUES & COSTS

Elastic
$200

Dollars

150

200 50

MR

D Q

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

$750

Dollars

500

TR
250

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

MONOPOLY REVENUES & COSTS

Elastic
$200

Inelastic

Dollars

150

200 50

MR

D Q

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

$750

Dollars

500

TR
250

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

OUTPUT AND PRICE DETERMINATION

Profit Maximization Under Monopoly

Remember the MR=MC Rule? 200

175 150

Price, costs, and revenue

Profit Per Unit

MC ATC D

$122 $94

125
100 75 50 25

Profit

MR = MC
0 1 2 3 4 5 6 7 8

MR
9 10

OUTPUT AND PRICE DETERMINATION

Profit Maximization Under Monopoly

200 175

Price, costs, and revenue

What About $122 Loss Minimization? Profit ATC $94

125
100 75 50 25

150

Profit Per Unit

MC

D
MR = MC
0 1 2 3 4 5 6 7 8

MR
9 10

OUTPUT AND PRICE DETERMINATION

Loss Minimization Under Monopoly

200 175

Price, costs, and revenue

Since Pm exceedsLoss AVC, Per Unit the firm will produce

MC ATC AVC D
MR = MC
0 1 2 3 4

150

A 125 Loss Pm
100

V
75 50 25

MR
Qm
5 6 7 8 9 10

OUTPUT AND PRICE DETERMINATION

Loss Minimization Under Monopoly

200 175

Loss Per Unit

Price, costs, and revenue

What are the A P Economic Effects V of Monopoly? D

150

125
100 75 50 25

Loss

MC ATC AVC

MR = MC
0 1 2 3 4

MR
Qm
5 6 7 8 9 10

INEFFICIENCY OF PURE MONOPOLY

P An industry in pure competition S = MC sells where supply and
demand are equal

Pm Pc

At MR=MC A monopolist will sell less units at a higher price than in competition

MR
Qm Qc

INEFFICIENCY OF PURE MONOPOLY

P S = MC

At MR=MC A monopolist will sell less Pm Monopoly pricing effectively units at a higher price Pc creates an income transfer from than in buyers to the seller! competition

MR
Qm Qc

(1) (2)

(1) (2) (3)

PRICE DISCRIMINATION
P

Price and Costs

Economic profits with a single MR=MC price

MC

ATC

MR
Q1

PRICE DISCRIMINATION
P A perfectly discriminating monopolist has MR=D, producing more product and more profit!

MC

Price and Costs

ATC

MR=D D Q1 Q2

PRICE DISCRIMINATION
P

Economic profits with price discrimination

MC

Price and Costs

ATC

MR=D D Q1 Q2

PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Expect New Competitors MC

ATC
Price and Costs
P1 A1

Economic Profits MR
Q1 Quantity

PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Expect New Competitors MC

ATC
Price and Costs

New competition drives down the P price level leading to economic A losses in the short run
1 1

Economic Profits MR
Q1 Quantity

PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION

MC ATC
Price and Costs
A2 P2

Economic Losses D MR
Q2 Quantity

PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION

MC ATC
Price and Costs

With economic losses, firms will exit the market Stability occurs Economic when economic profits are zero
Losses
D MR
Q2 Quantity

A2 P2

PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Long-Run Equilibrium MC

Normal Profit Only ATC

Price and Costs

P3 = A3

D MR
Q3 Quantity

MONOPOLISTIC COMPETITION AND EFFICIENCY

Long-Run Equilibrium MC
Price is Not = Minimum ATC ATC

Price and Costs

P3 = A3

Price MC
D MR
Q3 Quantity

OLIGOPOLY BEHAVIOR
A Game-Theory Overview
RareAirs Price Strategy

High
Uptowns Price Strategy

Low

A
High

$12

B
$6

$15

$12

C
Low

$6

D
$8

$8

$15

OLIGOPOLY BEHAVIOR
A Game-Theory Overview
RareAirs Price Strategy

High
Uptowns Price Strategy

Low

A
High

$12

B
$6

$15

$12

Greatest Combined Profit

C
Low

$6

D
$8

$8

$15

OLIGOPOLY BEHAVIOR
A Game-Theory Overview
RareAirs Price Strategy

High
Uptowns Price Strategy

Low

A
High

$12

B
$6

$15

$12

Independent Actions Stimulate Response

C
Low

$6

D
$8

$8

$15

OLIGOPOLY BEHAVIOR
A Game-Theory Overview
RareAirs Price Strategy

High
Uptowns Price Strategy

Low

A
High

$12

B
$6

$15

$12

Independent Actions Stimulate Response

C
Low

$6

D
$8

$8

Gravitating to the Worst Case

$15

OLIGOPOLY BEHAVIOR
A Game-Theory Overview
RareAirs Price Strategy

High
Uptowns Price Strategy

Low

A
High

$12

B
$6

$15

$12

Collusion Invites a Different Solution

C
Low

$6

D
$8

$8

$15

OLIGOPOLY BEHAVIOR
A Game-Theory Overview
RareAirs Price Strategy

High
Uptowns Price Strategy

Low

A
High

$12

B
$6

$15

$12

Collusion Invites a Different Solution

C
Low

$6

D
$8

$8

$15

OLIGOPOLY BEHAVIOR
A Game-Theory Overview
RareAirs Price Strategy

High
Uptowns Price Strategy

Low

A
High

$12

B
$6

$15

$12

Collusion Invites a Different Solution But, the incentive to cheat is very real

C
Low

$6

D
$8

$8

$15

KINKED DEMAND THEORY:

NONCOLLUSIVE OLIGOPOLY
The firms demand and marginal revenue curves

Price

D1
Quantity

MR1

KINKED DEMAND THEORY:

NONCOLLUSIVE OLIGOPOLY
The rivals demand and marginal revenue curves

Price

D2 MR2

D1
Quantity

MR1

KINKED DEMAND THEORY:

NONCOLLUSIVE OLIGOPOLY Rivals tend to follow a price cut

Price

D2 MR2

D1
Quantity

MR1

KINKED DEMAND THEORY:

NONCOLLUSIVE OLIGOPOLY Rivals tend to follow a price cut or ignore a price increase
Price

D2 MR2

D1
Quantity

MR1

KINKED DEMAND THEORY:

NONCOLLUSIVE OLIGOPOLY
Effectively creating a kinked demand curve

Price

D2 MR2

D1
Quantity

MR1

KINKED DEMAND THEORY:

NONCOLLUSIVE OLIGOPOLY
Effectively creating a kinked demand curve

Price

D
Quantity

KINKED DEMAND THEORY:

NONCOLLUSIVE OLIGOPOLY
Effectively creating a kinked demand curve MC1
Price

MC2

D
Quantity

MR

KINKED DEMAND THEORY:

NONCOLLUSIVE OLIGOPOLY Profit maximization MR = MC occurs at the kink
MC1
Price

MC2

D
Quantity

MR

KINKED DEMAND THEORY:

NONCOLLUSIVE OLIGOPOLY

This behavior can set off a price war

MC1
Price

MC2

D
Quantity

MR

CARTELS AND OTHER COLLUSION

Price and costs

Colluding Oligopolists Will Split the Monopoly Profits Economic Profit MC

P0

A0

ATC D
MR = MC Q0

MR