3rd edition by Mark Lovewell, Khoa Nguyen and Brennan Thompson
Learning Objectives
In this chapter you will:
consider the demand conditions faced by monopolists, monopolistic competitors, and oligopolists
see how monopolists, monopolistic competitors, and oligopolists maximize profits
learn about nonprice competition, and the arguments over industrial concentration
Monopolist’s Demand
A monopolist’s demand curve is the same as for the entire market
it is downward sloping
Demand Faced by a Monopolist Figure 6.1, Page 130
Demand Schedule
for Megacomp Quantity
Demanded
(computers per year) Price
($ millions per computer) $160
120
80
1
2
3 0 1 2 3 4 Quantity (computers per year) Demand Curve for Megacomp Price ($ millions
per computer) 40 80 120 160 200 a b c D
Monopolistic Competitor’s Demand
A monopolistic competitor’s demand curve is elastic because of many substitutes for the business’s product
Demand Faced by a Monopolist Competitor Figure 6.2, Page 131
Demand Schedule for
Jaded Palate Quantity
Demanded
(meals per day) Price
($ per meal) $11
10
9
8 100
200
300
400 D 0 100 200 300 400 Quantity (meals per day) Demand Curve for Jaded Palate Price ($ per meal) 2 4 6 8 10 12
Oligopolist’s Demand
All oligopolies are characterized by mutual interdependence.
Oligopolists in a market characterized by rivalry face a kinked demand curve.
A business raising price finds rivals keep theirs constant (so demand is flat).
A business reducing price finds rivals raise theirs as well (so demand is steep).
Actions and Reactions among Rivals in an Oligopoly Figure 6.3, Page 132
Action of
Company A
raise price
lower price Probable
Response of
Competitors
keep prices constant
match price drop Effect on
Company A’s
Market Share
product now high-priced, so market share falls
since all companies selling at lower price, Company A’s market share stays constant Company A’s
Quantity
Demanded
large increase as market share lost to competitors
small increase as lower prices for all companies attract new buyers
Demand Faced Among Rivals in an Oligopoly Figure 6.4, Page 132
Demand Schedule
For Centaur Cars Quantity
Demanded
(thousands
of cars per year) Price
($ thousands
per car) $35
30
20
10 10
20
25
30 0 10 30 Quantity (thousands of cars per year) Demand Curve for Centaur Cars Price ($ thousands per car) 10 20 40 D 30 20
Cooperative Oligopolies
There are various ways that oligopolists can cooperate
price leadership
collusion
cartel
Revenue Conditions for a Monopolist
A monopolist’s average revenue is the same as the downward-sloping market demand curve
A monopolist’s marginal revenue is below its demand curve because demand (average revenue) falls as quantity increases
Revenues for a Monopolist Figure 6.5, Page 134
$160
120
80
40 Revenue Schedules for Megacomp Quantity
(Q)
(computers per year) Price
(P)
($ millions
per
computer) Total
Revenue
(TR)
(P x Q)
($ millions) Marginal
Revenue
(MR)
(ΔTR/ΔQ)
($ millions
per
computer) Average
Revenue
(AR)
(TR/Q)
($ millions
per
computer) 0
1
2
3
4 $ 0
160
240
240
160 $160
80
0
-80 $160/1 = 160
240/2 = 120
240/3 = 80
160/4 = 40 3 0 1 2 4 Quantity of Computers per Year Revenue Curves for Megacomp $ Millions per Computer 40 80 120 160 200 -80 -40 D MR =AR
Profit-Maximization for a Monopolist (a)
A monopolist maximizes profit at the quantity where marginal revenue and marginal cost are equal. At this output, they charge the highest possible price, as found using the demand curve.
A monopolist meets neither the minimum-cost pricing nor the marginal-cost pricing conditions.
Profit Maximization for a Monopolist (b) Figure 6.6, Page 135
$160
120
80
40 0
1
2
3
4 $ 0
160
240
240
160 $160
80
0
-80 $ 60
40
70
150 Profit Maximization Table for Megacomp Quantity
(Q)
(computers per year) Price
(P)
(AR)
($ millions per computer) Total Revenue
(TR)
(P x Q)
($ millions) Marginal Revenue
(MR)
(ΔTR/ΔQ)
($ millions per
computer) Marginal Cost
(MC)
($ millions per
computer) Average Cost
(AC)
($ millions per
computer) $140
90
83
100 AC 0 1 3 4 Quantity of Computers per Year Profit Maximization Graph for Megacomp $ Millions per computer 40 80 160 200 MC MR D a 2 120 90 Profit = $60 million c b
Other Features of Monopolies
A monopolist charges a higher price and a lower quantity than would occur if the market were perfectly competitive.
Regulators of monopolies usually adopt average-cost pricing to make regulated monopolies break even.
Monopoly versus Perfect Competition Figure 6.7, Page 137
0 18 000 22 000 Quantity of T-Shirts per Day $ per T-Shirt 4 7 S(=MC) D MR a b c
Revenue Conditions for a Monopolistic Competitor
A monopolistic competitor’s average revenue is the same as its downward-sloping demand curve.
A monopolistic competitor’s marginal revenue is below its demand curve because demand (average revenue) falls as quantity increases.
Revenues for a Monopolistic Competitor Figure 6.8, Page 139
$--
11
10
9
8 Revenue Schedules for Jaded Palate Quantity
(Q)
(meals per day) Price
(P)
($ meal) Total Revenue
(TR)
(P x Q) Marginal Revenue
(MR)
(ΔTR/ΔQ) Average Revenue
(AR)
TR/Q) 0
100
200
300
400 $ 0
1100
2000
2700
3200 1100/100 = $11
900/100 = 9
700/100 = 7
500/100 = 5 1100/100 = $11
2000/200 = 10
2700/300 = 9
3200/400 = 8 0 100 200 300 400 Quantity of Meals per Year Revenue Curves for Jaded Palate $ per Meal 2 4 6 8 10 12 D MR = AR
Profit-Maximization for a Monopolistic Competitor (a)
The profit-maximizing quantity for a monopolistic competitor is found where marginal revenue and marginal cost are equal. Price is found using the business’s demand curve.
In the short run a monopolistic competitor may make a profit or a loss at its profit-maximizing point.
Profit-Maximization for a Monopolistic Competitor (b)
In the long run, a monopolistic competitor breaks even.
If profits (losses) are being made in the short run, new businesses enter (leave) the industry, pushing businesses’ demand curves leftward (rightward) and making them more (less) elastic.
The business meets neither the minimum-cost pricing nor the marginal-cost pricing rules, since too few units of output are produced.
Comments