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Monopoly Structure and Conduct
Dr. Jennifer P. Wissink
©2011 John M. Abowd and Jennifer P. Wissink, all rights reserved.
Market Structures: Briefly

Perfectly Competitive:
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–
–

Monopoly:
–
–
–
–

single firm
only imperfect substitutes in related markets
barriers to entry and possibly exit
full and symmetric information, or possibly not
Monopolistic competition:
–
–
–
–

many firms
identical products
free entry and exit
full and symmetric information
several firms
similar products but with some degree of
differentiation
free entry and exit
full and symmetric information
Oligopoly:
–
–
–
–
A few firms
similar products, degree of product differentiation
varies depending upon the market
there often are barriers to entry of some kind
full and symmetric information, or possibly not
Question

What is the market structure for each of these
products or firms: competitive, monopoly,
oligopoly, monopolistic competition?
–
–
–
–
–
–
–
The Campus Store (for textbooks)
The Campus Store (for Cornell memorabilia)
Gnomon copy service
Whole wheat bread
Mac computer
Windows computer
AmeriCom (long distance phone service)
Answers And Discussion
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
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

The Campus Store (textbooks): competitive thanks to Internet
book sellers.
The Campus Store (Big Red stuff): monopoly, these are
licensed products.
Gnomon Copy Service: local monopolistic competition due to
differentiated service among suppliers (possibly oligopoly, no
clear boundary).
Whole wheat bread: competitive
Mac computer: hardware and operating system monopoly.
Windows computer: hardware competitive; operating system
monopoly; complete systems monopolistic competition
(differentiated features).
AmeriCom: competitive, now hundreds of suppliers of long
distance service.
Classic Monopoly Structure
firm  firm is the market.
 No close substitutes, only imperfect
substitutes in related markets.
 Barriers to entry and possibly exit.
 Full and symmetric information, or
possibly not.
 Single
Sources Of Monopoly Entry
Barriers

Technical:
– Natural monopoly (1)
– Vital input ownership (2)
– Technical secrets (the better mousetrap) (3)

Legal:
– Patents (4)
– Franchises (5)
– Licenses (6)

Strategic:
– Buy ‘em up (7)
– Blow ‘em up (8)
– Let’s make a deal (9)
(2)
(9)
(5)
(4)
(6)
(3)
(7)
(8)
(1)
Monopoly Caveats
does not imply you’re big.
 Big does not imply you’re a monopoly.
 Monopoly does not imply you have absolute
and unlimited control over price.
 Monopoly does not imply you must have
positive economic profit.
 Short run profit does not imply monopoly
power.
 Monopoly does not imply a badly behaved
firm.
 Monopoly
The Classic Monopoly
 Polar
extreme from perfect competition.
 Monopolist is a “price maker” rather than a
price taker.
– Market demand = firm demand
– D=δ
 Cost
curves are pretty much the same
(except in the case of natural monopoly –
which we ignore).
 The big change from before is in the
demand side of the profit function.
The Simple Monopolist - Conduct

The simple monopolist abides by the “law of one price.”
Everyone pays the same market price for all units
purchased, there is no price discrimination.

The monopolist faces a declining market demand curve
for its product and chooses price which implies the
quantity (or chooses quantity which implies the price).

Now P > mr (before, under perfect competition, P=mr)
because the simple monopolist must lower the price on
all preceding units to sell an additional unit.

A monopolist has no “supply curve.”
Relationship Between Price And Marginal
Revenue For The Simple Monopolist


For all quantities greater than zero, the simple
monopolist’s price will be larger than the corresponding
marginal revenue.
Why?
– To sell an additional unit, the simple monopolist must lower the
price on ALL units sold.
– Example:
» Suppose the monopolist is selling 3 units at a price $12 per unit. Total
revenue is $36.
» Suppose to sell 4 units the monopolist must lower his price to $10 per unit.
Total revenue is now $40. He picked up $4 in revenue.
» Notice that his price at 4 units = $10/unit while his marginal revenue on the
4th unit is only $4.
» Why? Selling the 4th unit gave him $10 in additional revenue…
» … but he had to lower the price by $2/unit on the 3 units he used to sell for
$12/unit, so he loses $6 in revenue on these units.
» In the end he picks up $10-$6=$4 in revenue by selling 4 units at $10/unit.
Rules For SR Profit Maximization
 Suppose
we are in the short run.
 Rules for profit maximization are the same as
before.
 If QSM maximizes profit, then
– mr(at QSM) = srmc(at QSM)
» very important note: for a simple monopolist
P>mr at all positive levels of Q.
– QSM is a at a max and not a min.
– at QSM it’s worth operating, rather than
shutting down.
Simple Monopoly Marginal Revenue
With Linear Demand

Suppose demand curve is:
PD = 20 – 2Q

Total revenue = PD∙Q
$
$20
– Total revenue = (20 – 2Q)∙Q =
[20∙Q - 2∙Q2 ]

Marginal revenue = mr =
∆Total revenue/∆Quantity
– mr = 20 - 4Q
– Now compare this with PD

Demand
With a linear demand,
marginal revenue will have the
same vertical intercept and be
twice as steep!
Marginal
Revenue
5
10
Q
Graphical Display Of Simple Monopolist’s
Short Run Profit Maximizing Solution

(1) The
monopolist sets
marginal revenue
equal to marginal
cost.
– Then goes up to
the demand
curve to get the
price.


$
srmc
Psm
Demand
(2) Then makes
sure he is at a
max (and not a
min).
(3) Then makes
sure it is worth
operating in the
short run.
Marginal
Revenue
Qsm
Q
Implications Of Simple Monopoly
Short Run Profit Maximization


In the short run, the simple monopolist can have +, 0, or –
economic profit.
The simple monopolist will never operate on the inelastic portion
of his demand curve.
– Suppose the monopolist is operating on the inelastic portion of his
demand curve.
– Suggest he sell one fewer unit, but now at a higher price (for all the
units).
– If demand is price inelastic at the current price, his total revenue will
increase, if he takes your suggestion.
– Since he’s making fewer units his costs will decrease.
– So his revenues have increased and his costs have decreased, so
his PROFIT must have increased.
– Why does this “suggestion” eventually not work?

There is no short run supply curve to get.
Simple Monopoly With A Table:
New Demand & Cost Information
Quantity
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
160
170
180
190
200
Monopoly Selling in a Single Market at a Single Price
Marginal
Marginal
Market
Cost
Average
Revenue
Demand
Total
(midpoint
Total
Total
(midpoint
Economic
Price
Costs
formula)
Cost
Revenue
formula)
Profits
100.00
800
0.00
-800
95.00
1,500
82.50
150.00
950.00
90.00
-550
90.00
2,450
65.00
122.50
1,800.00
80.00
-650
85.00
2,800
42.50
93.33
2,550.00
70.00
-250
80.00
3,300
32.50
82.50
3,200.00
60.00
-100
75.00
3,450
20.50
69.00
3,750.00
50.00
300
70.00
3,710
18.50
61.83
4,200.00
40.00
490
65.00
3,820
9.50
54.57
4,550.00
30.00
730
60.00
3,900
9.00
48.75
4,800.00
20.00
900
55.00
4,000
10.00
44.44
4,950.00
10.00
950
50.00
4,100
12.50
41.00
5,000.00
0.00
900
45.00
4,250
17.50
38.64
4,950.00
-10.00
700
40.00
4,450
20.00
37.08
4,800.00
-20.00
350
35.00
4,650
25.00
35.77
4,550.00
-30.00
-100
30.00
4,950
30.00
35.36
4,200.00
-40.00
-750
25.00
5,250
35.00
35.00
3,750.00
-50.00
-1,500
20.00
5,650
45.00
35.31
3,200.00
-60.00
-2,450
15.00
6,150
60.00
36.18
2,550.00
-70.00
-3,600
10.00
6,850
75.00
38.06
1,800.00
-80.00
-5,050
5.00
7,650
100.00
40.26
950.00
-90.00
-6,700
0.00
8,850
44.25
0.00
-8,850
110
100
Market Demand Price
Marginal Cost
90
Average Total Cost
Marginal Revenue
80
70
Price
60
50
Monopoly profit
40
30
20
10
Quantity
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
0
Long Run Profit Maximization
With Simple Monopoly

Pretty much the same story as in the short run, but,
use correctly calculated long run cost information.

Positive economic profit invites entry, but since there
are barriers to entry positive economic profit can
persist.

Negative economic profit encourages exit, and if the
monopolist can get out he will.

Monopolist might make long run adjustments to
changes in the economic environment.