1This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Chapter 4 Organization Basic Monopoly Model

Profit Maximization Efficiency

Dominant Firms Monopsony

2This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

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

3This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Graphing Profit Maximization Inverse Demand Curve: P = 100 – 2Q Cost = 25 + 10q + q2

q

PriceTR, Profit

q0

125

250

375

500

625

750

875

1000

1250

1375

4

Calculations

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.

Inverse Demand Curve: P = 100 – 2Q Cost = 25 + 10q + q2

5

Calculations

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.

Inverse Demand Curve: P = 100 – 2Q Cost = 25 + 10q + q2

6

Calculations

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.

Inverse Demand Curve: P = 100 – 2Q Cost = 25 + 10q + q2

7This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Monopoly Profit, Deadweight Loss

Q

P

Inverse Demand Curve: P = 100 –Q Cost = 50q

MC

25

75

50

50 100

100

MR

8

Calculations

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.

Inverse Demand Curve: P = 100 –Q Cost = 50q

9This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Monopoly Markup

11MR P

10This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

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

11This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

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

12This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

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 <0?

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.

Q

P

Inverse Demand Curve: P = 100 –Q Cost = 50q

MC

25

75

50

50 100

100

MR

14This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Dominant Firm with a Competitive Fringe Why are some firms dominant?

Efficiency Patents Early Entry Government Favoritism Network Effects

15This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

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.

16This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Figure 4.6 Dominant Firm & Fringe

$/q $/q

q QDemand, D(p) Demand, D(p)

Supply from the Fringe, S(p)

Monopoly MR

17

Example Inverse market demand: P = 1000-Q Inverse Fringe Supply: P = 700 + Qf

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.

18

Example Inverse market demand: P = 1000-Q Inverse Fringe Supply: P = 700 + Qf

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.

19

Figure 4.6 Dominant Firm & Fringe

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.

$/q $/q

q QDemand, D(p) Demand, D(p)

Supply from the Fringe, S(p)

Monopoly MR

( ) ( ) ( )dD p D p S p

dMR

20This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Figure 4.6 Dominant Firm & Fringe

$/q $/q

q QDemand, D(p) Demand, D(p)

Supply from the Fringe, S(p)

Monopoly MR

( ) ( ) ( )dD p D p S p

dMR

MR Dominant Firm

21This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

Figure 4.6 Dominant Firm & Fringe

$/q $/q

q QDemand, D(p) Demand, D(p)

Supply from the Fringe, S(p)

MR Dominant Firm

22

Monoposony Single buyer Sellers are price takers

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.

23

Monopsony

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.

L

W

Supply: W = L

25 100

100

Marginal Revenue Product of Labor = 100 – L

50

MRPL= 100 - L

24

Monopsony Workspace

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.

25

Monopsony Workspace

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.