Presiding Officer Training module 2024 lok sabha elections
Monopoly
1. Monopoly
“Give ‘em any color they want so long as it is black”
-Henry Ford’s response to requests for more colors on the
popular Model T
Slide 1 of 23
2. We now continue in our study
of firm behavior…
Slide 2 of 30
We now turn our attention to an environment where
there is not any competition.
In this module, we’ll explore how monopolies behave,
how they make decisions, and how they compete (or
more specifically how they do not!).
It covers a key learning outcome and if you continue to
study economics, you will see it all again.
3. Monopoly…one firm…lots of market power.
If you want to buy it, you have to buy it from
them.
We now turn our attention to the second
market structure - monopolies
Perfect Competition Monopolistic Competition Oligopoly Duopoly Monopoly
Slide 3 of 23
4. Recall the characteristics of monopoly
Perfect Competition Monopolistic Competition Oligopoly Duopoly Monopoly
At this end of this spectrum, there is no competition. Mono
means one. Only one firm exists.
Characteristics of a monopoly:
A single firm produces the entire supply of
a product
This means that the producer
does not face competitors.
Examples might include a cable
or power provider in a rural area.
The producer’s product does not have
substitute
Firms are price makers
There are substantial, often
insurmountable barriers to entry
This means that buyers cannot
switch to another product. If you
want to buy it, you must buy it
from the monopolist.
Examples include Windows or
diamonds.
This means that producers can
set the price as high as the
market will bear.
Examples include property
owners.
This means that it is very difficult
to begin producing this product.
Imagine trying to start a
professional sports league.
Examples include the NFL and
NBA.
Monopolies
Slide 4 of 23
5. Monopolistic industries
also have unique qualities
• The product has no substitutes
• There is one supplier-the firm is the
industry
• There are substantial, sometimes
insurmountable barriers to entry
• Firms are “price makers”
• Producers face a downward sloping
demand curve
The Characteristics of a
Monopolistic Industry
These characteristic will be
described a little later.
Monopolies
The next slide will provide an
example for these.
Slide 5 of 23
6. Microsoft acts as a monopolist
The product has
no substitutes
Some of you might say, “what about Red
Hat”, but most of us have never even seen it.
There is only one
supplier
If you want a PC operating system, you must
buy it from Windows (for 90+% of us)
There are
insurmountable
barriers to entry
Go ahead and design an operating system
and try to compete with Microsoft. How do
you think you’ll do?
Here are some other’s who have
competed with Microsoft and lost:
Monopolies
Monopolistic
Characteristic Comment
Slide 6 of 23
7. Key characteristics of a monopoly as
compared to perfect competition
Monopolies
Slide 7 of 23
8. The monopolist’s demand
curve is downward sloped
Monopolies
We saw that a perfectly competitive firm’s demand
curve was perfectly elastic.
For a monopolist the demand curve is downward sloped. It
is the same as the industry’s demand curve.
Why? Because the monopolist is the industry. If a good or
service is demanded and it is produced by a monopolist, it
is demanded from the monopolist.
Monopolist’s Demand
Slide 8 of 23
9. A monopolist’s production decision
Monopolists determine their profit
maximizing rate of output the
same way a perfectly competitive
firms do:
The profit maximizing rate of
output is where MR=MC
Monopolies
They determine price differently.
My perfectly
competitive
counterparts take the
price that the market
gives them.
I am the market. I
don’t have to take the
market price, I can
choose the price that
maximizes MY profit.
I am a “Price Maker”.
Slide 9 of 23
10. To see how a monopolist determines price, we
first need to calculate their marginal revenue
For a perfectly competitive firm, the market would buy as
much as the firm could produce. They had no influence
on price because they were an insignificant part of the
market.
Monopolies
For a monopolist, they can lure more buyers with a lower
price. They do have an impact on the market because
they are the market.
In this scenario, for each ten dollar reduction in price, an
additional unit is demanded.
Unlike perfectly competitive firms, monopolists must
consider price.
Slide 10 of 23
11. To see how a monopolist determines price, we
need to first calculate their marginal revenue
With a perfectly competitive firm, marginal revenue was
constant. Each successive unit sold brought in the same
revenue. Specifically, it brought in the market price.
Monopolies
For a monopolist, marginal revenue varies as you can
see in the table. Be sure you understand how the last
two columns are calculated. Recall:
Slide 11 of 23
12. Monopolists do not have unlimited
pricing power
Let’s review one important point.
We call monopolists price
makers because they influence
price – they get to select the
price that maximizes their profit.
That does not mean they have
unlimited power to charge
anything they want.
Remember that we as
consumers still have one
choice…we can go with out this
good!
At a price of $190, there is no
demand. A monopolist must
lower price to “lure in” customers.
Slide 12 of 23
13. Marginal revenue, seen graphically
Monopolies
Again, note the downward
sloping demand curve that the
monopolist faces.
Recall that for a perfectly
competitive firm, Demand
equaled MR. They were the
same curve. For a monopolist
they are not!
The MR curve will be more
steep. As price is lowered for
one unit, it is lowered for all the
units and that reduces marginal
revenue.
Slide 13 of 23
14. Let’s analyze the production
decision of a monopolist
Monopolies
Henry Ford, 1919
Using the price, demand, and revenue data we
looked at in the last few slides, we can illustrate
how a monopolist such as Henry Ford may have
made two key decisions:
#1 – How many units do I want to
produce?
#2 – What price do I want to
charge for each one?
In order to analyze these decisions we need
some costs data- specifically marginal cost (MC)
and Average Total Cost (ATC). I’ll make those
up for the next slide…
Slide 14 of 23
15. Determining profit maximizing output
and price for a monopolist
Here we have added the
MC curve
Monopolies
Like the perfectly competitive firm,
the monopolist will maximize profit
where MR=MC.
But what price
will the
monopolist
charge?
The monopolist will charge as much
as the market will bear. Follow the
intersection of MR=MC all the way
up to the demand curve.
So how much profit will this
monopolist earn? We need to add
the ATC curve to determine that.
Much like the perfectly competitive
firm, the monopolist’s profit will be
measured by this profit box.
It is the difference
between the price of the
good and the average
cost per unit (i.e. profit
per unit)…
…times the number of
units sold.
In this case it is about
$38 (profit per unit)
times 6 units…
which is $230 in
economic profit.
Slide 15 of 23
Now we see how a
monopolist makes
a decision based
on marginal benefit
(revenue) –
marginal cost
analysis….a key
learning outcome!
16. Let’s conduct the same analysis from
a table.
Monopolies
Determining profit maximizing output
and price for a monopolist, in a table
With no units produced, profit will be
-$100, which are the fixed costs.With one unit produced, profit will be
-$10, but MR>MC so expand
production.
With two units produced, profit will be
$70, but MR>MC so expand
production.
With six units produced, profit will be
$230, and MR=MC. The monopolist
should stop there.
With output above 6 units, MC>MR.
The monopolist should not produce
these units - they cost more to make
than they bring in!
One additional note- You might notice that
profit is the same if the monopolist
produced 5 units or 6 units. In these
cases, always choose the higher output.
This happens whenever MR=MC at a
whole unit of output, such as 6.
You could argue that the monopolist should
not produce the 6th unit and have a good
case. But think of it this way: the
additional unit might expand your market
and provide word of mouth advertising!
Slide 16 of 23
17. Individual Exercise
What is the profit maximizing level of output for this monopolist?
What is the profit at that output?
Monopolies
5 units
$225
Please fill in the blank cells and answer the two questions below. Click to see the answers.
Slide 17 of 23
19. Barriers to entry allow
the monopolist to exist
Monopolies
Recall, for perfectly competitive industries, the
existence of economic profits would lure other
firms into competition.
For monopolistic
industries, this doesn’t
happen because there
are barriers to entry.
And with no barriers to entry,
there is nothing stopping those
firms from jumping in!
Slide 19 of 23
20. Examples of barriers to entry
• Legal Harassment
– In the 1990s, a small Massachusetts firm was caught
hacking into Microsoft code
– Microsoft filed a lawsuit against it for hacking into their
software.
– The army of lawyers that Microsoft is capable of
unleashing upon you certainly could act as a barrier to
entry!
Monopolies
• Patent Protection
– Polaroid developed the Instant camera. They quickly
patented it
– Kodak, copied it and sold their own
– Polaroid sued Kodak and won a $910 million verdict
– The lawsuit put Kodak out of the instant camera
market for good (that is some barrier!)
Slide 20 of 23
21. Examples of barriers to entry (Part 2)
Monopolies
• Exclusive licensing
– As a consultant, I was required to sign a no-compete
agreement upon hiring
– Upon leaving the company, I could not compete with
them for 7 years
– That is a serious barrier for me to enter an industry
• Bundled products
– Producers can sell packages of products to ensure
users avoid a competitors product
– Bundling Explorer and Office products allowed
Microsoft to obtain 96% of the browser market (Over
Netscape) and 94% of the word processor market
(over WordPerfect)
Slide 21 of 23
22. Examples of barriers to entry (Part 3)
Monopolies
• Government Franchises
– In some cases, government’s allow monopolies
– Why, it would be silly to have multiple sets of power
lines all over town
– If the government gives you a franchise that means
others can’t enter the market, another example of a
barrier to entry
• Predatory actions
– These are my favorite
– Predatory action are borderline unethical or illegal
actions designed to keep competitors out
– The next 2 slides give a good example
Slide 22 of 23
23. A real world application of
predatory actions as a barrier to entry
John D. Rockefeller was the Chairman of Standard Oil.
Monopolies
He dominated the oil and fuel industries in the early 1900s.
He was known to arrive in a town and offer a gas station owner
shares of his company in exchange for their station.
Those that agreed became rich.
Those that did not woke up to find him opening a gas station
near theirs.
He gave the gas away until the gas station owner went out of
business.
Then, as the only producer (monopolist) he restricted output and
drove prices higher.
Slide 23 of 23
24. In Summary
Unlike perfectly competitive firms,
monopolies are the only sellers.
This gives them market power – allowing
them to have some control over price
(They are price takers)
As a result, they can earn significant
economic profits.
In perfect competition, the entry of new
firms causes that economic profit to
eventually fade away.
For a monopoly, barriers to entry
ensure that they get to continue to
enjoy those profits! Slide 24 of 23
