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-Many small firms producing -A few firms with similar -A single firm producing a
identical goods products, but not perfect good without close substitutes
-Price is the market price; substitutes -Firm can price wherever it
firms are price takers. -Firm can price above wishes along the demand
perfectly competitive, but curve.
below monopoly.
2 $8 $16 $7
3 $7 $21 $5
4 $6 $24 $3
Demand
Marginal Revenue
Monopoly Profit Maximization
Produce where MR = MC.
Charge the price on the demand curve that corresponds to that quantity.
MC
$
Profit AC
PM
AC
QM Q
MR
A Simple Linear Example:
P(Q) = 100 - Q
TC(Q) = 100 + 20Q + Q2
E = -1
D
E=0
Quantity
MR
If produce on inelastic region, the monopolist
can increase revenue by cutting production
P TR
100
Elastic Unit elastic
80 Unit elastic
60 1200
Inelastic
40
20 800
0 10 20 30 40 50 Q 0 10 20 30 40 50 Q
Elastic Inelastic
Market Power
MC1
MC2
MCT
6 • • •
3 6 9 Quantity
Example: Multi-Plant Monopolist Maximization
Price
MC1
MC2 MCT
P*
Demand
Quantity
Q*1 Q*2 Q*T MR
Example
Q1. What are the monopolist's optimal total quantity and price?
Q1 = -1/2 + (1/20)MCT
Q2 = -12 + (1/5)MCT MCT = MC1 + MC2 ? Wrong!
This is vertical sum!
QT = Q1 + Q2 = -12.5 + .25MCT The monopolist should allocate
Q = Q1+Q2 so that
Thus,
MC1(Q1) = MC2(Q2) = MCT
MCT = 50 + 4QT
Step2: Using the monopolist's profit maximization condition:
Q T* = 7
P* = 120 - 3(7) = 99
Q2. What is the optimal division of output across the monopolist's plants?
MCT* = 50 + 4(7) = 78
Deadweight Loss
$
of Monopoly
MC
PM
MC
D
QM MR Q
Antitrust and Competition Laws
AC
MC
Q/2 Q
Source 2: “Created” Barriers to Entry
Government Regulation
♦ When economies of scale are strong, limiting competition
may avoid duplication and reduce the cost of service.
♦ Examples: local telephone service, electricity and gas,
postal services.
Patents, licenses, and copyrights
♦ Intellectual property protection helps the producers
monopolize and legally enforce their market power.
♦ Examples: Eli Lilly’s patent to Xigris; Microsoft’s
copyright over Office 2013.
Intellectual Property