This document discusses market power and monopoly. It provides examples of monopoly problems and their solutions. Key points covered include: 1. Deriving monopoly profit-maximizing conditions, profits, and surplus in a market with monopoly power. 2. Comparing monopoly to perfect competition and discussing the implications of monopoly pricing. 3. Explaining price discrimination and how it can increase monopoly output and profits compared to single-price monopoly.

1. More on Market Power
April 10, 2013

2. Announcements
• Problem Set 2 is now posted on the website.
• PS2 due at the beginning of Monday’s class.

3. Last Class: Comparing Monopoly
and Perfect Competition
Perfect Competition: ``Price-
Monopoly: ``Price-Setter’’
Taker’’
Choose Q and P to
Zero Profits Always
Profit-Maximize
P >MR P = MR
P > MC P = MC
Deadweight No Deadweight
Loss Loss
3

4. Learning Goals for Today
• Expertly derive:
– Monopoly profit-maximizing conditions
– Monopoly profits
– Surplus in a market with monopoly
• Derive surplus when monopoly can price
discriminate
• Compare and contrast oligopoly and
monopolistic competition with pure monopoly

5. Verizon is the only supplier of cable in
a given city because no other can
afford to lay down cable. What type of
monopoly is it / what is the source of
its market power?
A. Exclusive control of inputs.
B. Patents and copyrights.
C. Government licenses.
D. Network economies.
E. Natural monopoly.

6. Say a monopoly pays 5 for a factory
and uses production technology
Q=L1/2. The only input, labor (L), costs
w=1 per unit. What is TC when Q=5?
A. 10
B. 15
C. 20
D. 25
E. 30

7. As derived, TC=5+Q2. In addition,
PD=10-2Q. What is closest to the
monopolist’s profit-maximizing level
quantity choice?
A. 1
B. 1.33
C. 1.66
D. 2
E. 2.5

8. TC=5+Q2 and PD=10-2Q. What is
closest to monopoly profits?
A. Negative profit, shut down.
B. 0
C. 3.33
D. 6.66
E. 10

9. Claim: This is a natural monopoly like
Verizon. Recall: FC=5, Q=L1/2, w=1.
A. True.
B. False: There is no capital in production
C. False: Fixed costs are too small
D. False: Marginal cost is increasing

10. Calculate Surplus
• TC=5+Q2 and PD=10-2Q
• Take 5 minutes to see if you can calculate CS,
PS, and DWL for this economy on your own.
• Hint: DWL is the difference between CS+PS in
perfect competition versus CS+PS with some
imperfection.
• Will do on board when finished.

11. General Form of Monopoly Problems
• Given:
– Fixed Costs
– Production Function: Generally Q=KaL1-a
– Variable Costs: w for L and r for K
– Demand
• Derive:
– TC, ATC, MC given Fixed Costs, Prod Func, and Var
costs
– MR given Demand
– Profit-max. condition and Profit given the above
– Surplus
• Write your own using Q=K1/2 and r=1.

12. Now let’s switch gears
• Price discrimination
• Monopolistic competition
• Oligopoly
– All of these points are of secondary importance to
monopoly for now.

13. Price Discrimination
• Thus far we have assumed all buyers charged the same.
• Price Discrimination: The practice of charging different buyers
different prices for essentially the same good.
• How does price discrimination affect output and profits?
P P
CS
DWL
PS PS
MC=ATC MC=ATC
MR D D
Q Q
Perfectly Price
Single-Price Monopolist
Discriminating Monopolist

14. Example
• Rebates: The assumption is that people with high reservation
prices are wealthy and that the opportunity cost of their time
is too high to be bothered to fill out the paperwork to get the
rebate.

15. Which of the following is price
discrimination in this case?
A. Efficient
B. Good
C. Inefficient
D. Bad
E. Can’t Say

16. Other types of Imperfect Competition
Besides Monopoly
Monopolistic Competition:
A market in which a large number of
firms sell products that are close (but
not perfect) substitutes.
Examples?
Have some ability to raise price in the short-run, but free entry will lead to
zero (economic) profits in the long run.
Most important strategic decision: how to differentiate products from
rivals’ products?
Markup

17. Types of Imperfect Competition
3. Oligopoly:
A market in which a small number of large firms sell
products that are either close or perfect substitutes.
Examples?
Usually arise because of cost advantages of being large—
thus, no presumption that free entry will drive profits to
zero, but no guarantee that oligopolists will earn zero profits.

18. Next Class
• We’ll begin with a clicker quiz on the material
covered this week (if I can figure that out.)
• It’s not graded, it’s for you to gauge your
understanding.
• If works out well, will make Friday mornings
clicker quizzes from here out.