Post on 15-Jan-2016
Introductory Microeconomics (ES10001)
Topic 5: Perfect Competition & Monopoly
1. Introduction
MR = MC rule requires knowledge of market structure
One of the major influences on MR, and thus on its supply decision, is the degree of competitiveness the firm faces in the market.
That is, the number of actual and potential competitors
1. Introduction
This makes sense! If firm is the only player in the market, then we would expect it to behave differently than if it were one of (very) many
In what follows we will examine the causes and effects of market structure
2. Taxonomy of Competition
Microeconomics has tended to categorise the degree of competition a particular firm faces into three very precise and distinct categories:
A lot;
A bit;
None!
Perfect Competition
Collusive (i.e. Cartel)
Oligopoly
Monopoly
Monopolistic Competition
Imperfect Competition
Non-Collusive
Figure 1: Taxonomy of Competition
More Competition Less Competition
3. Perfect Competition
Market structure where competitive forces are at their greatest
Definition: A Perfectly Competitive (PC) market is one in which both buyers and sellers believe that their own buying or selling decisions have no effect on the market price
Sometimes referred to as an ‘atomistic’ market
3. Perfect Competition
Formal Characteristics
1. (Very) Large number of buyers and sellers;
2. Homogenous product;
3. Free entry and exit (in long-run);
4. Perfect knowledge.
Implication: All firms face same, perfectly elastic, demand curve
p
0
Q0 Q q
p0
S0
D0
d0
Figure 2: Perfectly Elastic Demand
Industry Representative Firm
E0
3. Perfect Competition
Why would firm not raise or lower price above or below p0?
If p > p0, then it would sell nothing because consumers have perfect knowledge and good is homogenous
Conversely, no point in setting p < p0 since it can sell as much as it wishes at p0
3. Perfect Competition
Firm’s demand curve is also its AR and MR curve
Recall:
AR = TR / q
MR = ΔTR / Δq
Since demand is perfectly elastic, AR = MR = p
p
0 q
d
1 2
5
Figure 3: Demand = AR = MR
E0 E1
p
0 q
d
1 2
5
Figure 3: Demand = AR = MR
E0 E1
TR1=5
AR1=5/1=5
p
0 q
d
1 2
5
Figure 3: Demand = AR = MR
E0 E1
TR2 =2*5=10
AR2=5/1=5
MR2 = TR2–TR1= 5
p
0 q
d = AR = MR
1 2
5
Figure 3: Demand = AR = MR
E0 E1
3. Perfect Competition
Consider short-run profit maximising rule
First, we know that to maximise profit we need to set SMR = SMC
But, SMC must also be rising …
… otherwise, profit (loss) is minimised (maximised)
p
0 q
SMC
q0 q1
p0 d = AR = MR
Figure 4: Optimal Output
E0 E1
π min π max
3. Perfect Competition
Thus, short-run profit maximising rule
(1) MR = SMC
(2) SMC is rising
But, it could always be in firm’s interest to produce nothing!
Is there a ‘shut-down’ price?
p
0 q
SMC
SAVC
SAC
q0
p0
SAC0
PROFIT
Figure 5: Demand = AR = MR
π > 0
Eo AR =MR
p
0 q
SMC
SAVC
SAC
q1
p1 AR = MR
Figure 6: Demand = AR = MR
π = 0
E1
p
0 q
SMC
SAVC
SAC
q2
p2
SAC2LOSS < - TFC
Figure 7: Demand = AR = MR
- TFC < π < 0
MR
E2
p
0 q
SMC
Figure 8: Demand = AR = MR
π = - TFC < 0
SAC
q3
p3
SAC3
LOSS = TFC
SAVC
AR = MR
E3
p
0 q
SMC
SAVC
SAC
q4
p4
SAC4
LOSS > TFC
Figure 9: Demand = AR = MR
π < - TFC < 0
AR = MR
E4
3. Perfect Competition
Thus, short-run profit maximising rule
MR = SMC
SMC is rising
p > SAVC
Supply curve of the firm is that part of its SMC curve above minimum SAVC
p
0 q
SMC
Figure 8: Demand = AR = MR
π = - TFC < 0
SAC
q3
p3
SAC3
LOSS = TFC
SAVC
AR = MR
E3
p
0 q
SMC
Figure 8:
p3
AR = MR
SAVC
p
0 q
SR Supply
Figure 8:
Min AVC
3. Perfect Competition
Note, short-run ‘shutdown’ price = p3 = SAVC(q3)
π(p3) = p3*q3 – SAC(q3)*q3
= [SAVC(q3) – SAC(q3)]*q3
= -AFC(q3)*q3
= -TFC
3. Perfect Competition
Thus, short-run supply curve of firm is that part of its SMC above minimum AVC
Similarly, long-run supply curve is that part of LMC above minimum LAC
i.e. long-run ‘shutdown’ option is to leave the industry
p
0 q
LMC
LAC
q0
p0 AR = MR
Figure 10: Long-Run Shut-Down
3. Perfect Competition
Compare SR and LR supply curves
SR supply curve of firm is that part of its SMC above minimum AVC; similarly, long-run supply curve is that part of LMC above minimum LAC
i.e. LR ‘shutdown’ option is to leave the industry
Note that SR supply curve lays below LR supply curve (recall ‘Envelope’) and is steeper
p
0 q
SSR
SLR
p1
p0
Min LAC
Min AVC
Figure 11: Long-Run & Short-Run Supply
3. Perfect Competition
SSR lays below SLR because LAC is envelope of SAC’s and SAVC’s lay below SAC since SAC includes AFC
SSR is steeper than SLR because it will always be less costly for firm to increase output when it can alter all inputs (i.e. K an L) appropriately (i.e. when it is in LR)
Now, consider MR = MC condition
3. Perfect Competition
TR0 = p0q0
TR1 = p1q1
Thus:
ΔTR =TR1 - TR0 = p1q1 - p0q0
= p1q1 - p0q0 + (p1q0 - p1q0)
= p1q1 - p1q0 + p1q0 - p0q0
= p1(q1 - q0) + (p1 - p0)q0
3. Perfect Competition
ΔTR = p1(q1 - q0) + (p1 - p0)q0
= p1Δq + Δpq0
Thus:
Consider ‘small’ changes in (p, q) such that p1 ≈ p0, q1 ≈ q0 , and so (p0, p1) ≈ p and (q0, q1) ≈ q
3. Perfect Competition
Thus:
Now, recall:
3. Perfect Competition
Thus:
Under perfect competition, E => ∞ such that MR => p
Also, since MR = MC in equilibrium, then:
3. Perfect Competition
Thus:
3. Perfect Competition
Lerner (1934) ‘Index of Monopoly Power’
Note that under perfect competition, E => ∞ such that p => MC
Firms can only ‘mark-up’ p over MC iff E < ∞
p
0 q
da
Figure 12: Elasticity of Demand and Slope of (Inverse) Demand Curve
db
dc
E0
3. Perfect Competition
Industry Supply
SR industry supply curve (when factor prices are given) is the horizontal summation of each firm’s SMC curve above minimum AVC
Similarly, LR industry supply curve (when factor prices are given) is horizontal summation of each firm’s LMC curve above minimum LAC
p p p
0
p0
p1
p2
0 0
Firm A Firm B Industry
q0 q1 q2 q0 q1 q2 Q0 Q1 Q2 qa qb Q
Figure 13: SR Industry Supply
3. Perfect Competition
Consider effect of an exogenous increase in industry demand for the good
Increase in demand will increase each existing firm’s profit
Existing firms increase SR supply by moving up their SMC curves
p p
0
Q0 Q q0 q
p0
D0
d0
SMC
Figure 14a: SR Industry Supply
SAC
E0e0
Industry Representative Firm
p p
0
Q0 Q1 Q q0 q1 q
p0
D0
d0
SMC
d1
D1
Figure 14b: SR Industry Supply
SAC
E0
E1
e0
e1
Industry Representative Firm
3. Perfect Competition
But, the existence of super-normal profits will attract other firms into the industry
This will shift out industry (SR) supply curve and lead to a fall in the (perfectly elastic) demand facing individuals firms
Industry supply is higher because of entry of new firms; each firm produces same amount in new equilibrium (E2) as original firms produced in original equilibrium (E0)
p p
0
Q0 Q1 Q2 Q q0 q1 q
p0
D0
d0
SMC
d1
D1
Figure 14c: SR Industry Supply
SAC
E0 E2
E1
e2 = e0
e1
Industry Representative Firm
3. Perfect Competition
LR supply curve of industry is horizontal / perfectly elastic
LR supply price of industry is equal to minimum LAC of constituent firms
Thus, demand only determines quantity; price is supply (i.e. cost) determined)
p P
0 q* q 0 Q* Q
p* SLR
LMC
LAC
e*
D
E*
Figure 15: LR Industry Supply
Representative Firm Industry
3. Perfect Competition
LR supply curve of industry is upward sloping in two situations:
1. Factor prices increase with usage
2. Heterogeneous firms
Consider each in turn
3. Perfect Competition
Consider first the SR response of a representative firm and the industry to an increase in demand
If factor prices increase with usage, then increase in demand induces each firm to increase output along its SMC curve
But, increase in industry supply of output increases demand for / price of the variable input
3. Perfect Competition
Increase in price of variable input shifts up vertically each firm’s SMC curve
The expansion of output by each firm can thus be interpreted as a combination of a ‘movement along’ and a ‘shift of’ its SMC curve
Similarly, the expansion of output by the industry - combination of a ‘movement along’ / ‘shift of’ the aggregation of constituent firms’ SMC curves
p p
0
q0 q1 q Q0 Q1 Q
p0
D1
∑SMC0
D0
SMC1
Figure 16: SR Industry Supply
Factor prices increase with usage
e0
e1E1
E0
Representative Firm Industry
SMC0
SSR
p1
∑SMC1
∑SSR
3. Perfect Competition
In LR, free entry / exit implies each firm produces at minimum LAC
If firms are equally efficient, then firms have same minimum LAC and industry supply is perfectly elastic
Intuitively, whatever happens to demand, SR supply, and thus price, competitive forces ensure a normal-profit LR equilibrium such that LR supply is perfectly elastic at minimum LAC
3. Perfect Competition
But this presumes factor prices are fixed
What if factor prices increase with their usage?
In this case, then LR expansion of output by the industry will increase the price of all factors such that each constituent firm’s LAC and LMC will shift-up
3. Perfect Competition
Thus, LR industry response to increase in demand when factor prices increase with their usage is a combination of:
(i) a ‘movement along’ a perfectly elastic LR supply curve (i.e. one determined by minimum LAC of equally efficient constituent firms, but where factor prices are held constant);
(ii) a ‘shift-up’ of such a curve (i.e. where factor prices are allowed to increase)
p
0 Q
D1
Figure 17: LR Industry Supply
Factor prices increase with usage
D0
E1
E0
3. Perfect Competition
Consider also ‘heterogeneous firms’
i.e. inter-firm differences in efficiency
The earlier firms enter into an industry, the lower their cost curves; subsequent firms are increasingly less efficient
3. Perfect Competition
At any particular LR equilibrium price, p*, the least efficient (i.e. ‘marginal’) firm is that firm which can make just normal profit at p*
The more efficient (i.e. ‘intra-marginal’) firms make positive profits at p* and, thus, produce in the region of DRS
p p p
0
0 0
(Intra-Marginal) Firm 1 (Marginal) Firm 2 Industry
SLRLMC1
LMC2
LAC2
D
LAC1
p*
q1 q q2 q Q* Q
LAC1
Figure 18: LR Industry SupplyHeterogeneous Firms
e2E*
e1
4. Monopoly
Consider now the other extreme market environment
Monopoly; single seller
The monopolist is the industry; no distinction between firm and industry; less need to distinguish SR and LR since entry / exit is less of an issue
Consider monopolist's AR and MR curves
4. Monopoly
As with PC firm, demand curve is also the AR curve
But since AR curve is downward sloping, MR curve lays below AR curve
Intuitively, to sell more Q, monopolist has to cut p on all units of Q
p
0 Q
D = AR
TR1 = p1
TR2 = 2p2
MR2 = 2p2 - p1
= p2 - (p1-p2) < p2
1 2
p1
p2
MR2
MR
Figure 19a: AR and MR
A
B
C
p
0 Q
D = AR
TR1 = p1
TR2 = 2p2
MR2 = 2p2 - p1
= p2 - (p1-p2) < p2
1 2
p1
p2
MR2
MR
Figure 19b: AR and MR
A
B
C
p2
p
0 Q
D = AR
TR1 = p1
TR2 = 2p2
MR2 = 2p2 - p1
= p2 - (p1-p2) < p2
1 2
p1
p2
MR2
MR
Figure 19c: AR and MR
A
B
C
p2
(p1-p2)
4. Monopoly
We will assume that the monopolist, like PC firms and industries, faces increasing and then decreasing returns to both factors and scale; i.e. ‘U-Shaped’ SAC / LAC
N.B. Monopoly that faces IRS always is termed a ‘Natural Monopoly’
Monopolist's profit can be supernormal (most likely), normal or negative
p
0 Q
LMC
LAC
Q0
p0
LAC0D = AR
MR
Profit
Figure 20a: Monopolist LR Equilibrium
π > 0
p
0 Q
LMCLAC
Q0
p0
LAC0
D = ARMR
Loss
Figure 20b: Monopolist LR Equilibrium
π < 0
p
0 Q
LMC
LAC
Q0
p0 = LAC0
D = ARMR
Figure 20c: Monopolist LR Equilibrium
π = 0
4. Monopoly
Consider efficiency
Allocative Efficiency (AE)
p = MC
Productive Efficiency (PE)
IRS are exhausted such that LAC is minimised
4. Monopoly
(Non-Discriminating) monopolist is never AE and (extremely) unlikely to be PE
PE would require MR curve to cross MC at minimum AC
It can happen, but infinitely small chance!
p
0 Q
LMC
LAC
Qmes
pmes
LACmes
D = AR
MR
Figure 21: Monopolist LR Equilibrium
Productive efficiency is possible, but very unlikely!
4. Monopoly
Allocative Efficiency requires marginal (social) benefit (MSB) to equal marginal (social) cost (MSC)
Define: MSC = MPC + MEC
MSB = MPB + MEB
i.e. marginal social benefit (cost) equals marginal private benefit (cost) plus marginal external benefit (costs)
4. Monopoly
Private benefits (costs) are those enjoyed (incurred) by agent producing or consuming) the good
External benefits (costs) are the non-price effects on the production or consumption of other members of society
Assume (for now!) that MEC = MEB = 0 such that allocative efficiency requires MPC = MPB
4. Monopoly
Now:
MPC = LMC of monopolist
MPB = price consumers willing to pay for good
Thus, the MPB can be derived from the monopolist's Demand = AR curve
Recall, the (inverse) demand curve sets out consumer's reservation price vis. the maximum price the consumer is willing to pay
p
0 Q
D = MPB
Q1 Q2 Q3
p1
p2
Figure 22: D = MPB
A
B
Cp3
4. Monopoly
It is apparent that the monopolist produces less output than the socially optimal (allocatively efficient) level
Monopolist maximises profit by setting MR = MC
Allocative efficiency is achieved when p = MC
Since p > MR, it must be the case that monopolist output is less than socially optimal
p
0 Q
LMC = MPC
LAC
Q0 Q1
p0
LAC0D = AR = MPB
MR
Figure 23: Monopolist LR Equilibrium
DWL = ABC
A
C
B
Privately Optimal
Socially Optimal
4. Monopoly
Consider the (‘overnight’) monopolisation of a PC industry
The constituent firms of the industry become manufacturing plants for the monopolist
Assume that the SLR = ∑LMC of the PC industry becomes the monopolist’s LMC curve (N.B. heterogeneous firms thus SLR is upward sloping)
4. Monopoly
Define social welfare (SW) as sum of consumer surplus (CS) and producer surplus (PS)
SW = PS + CS
NB: No concern with equity! 1+ 99 = 100 = 99 + 1
Define CS as excess of what consumers are willing to pay over what they actually pay; PS as excess of what producers actually receive over what they are willing to receive
p
0 Q
D = AR
Qc
pc
CS
SLR
PS
A
B C
D
Figure 22a: Monopoly and PC
Perfect CompetitionCS = ABCPS = BCDSW = ABD
p
0 Q
D = AR
Qm Qc
pc
MR
LMC
A
B C
D
pm E
F
G
Figure 22a: Monopoly and DWL
MonopolyCS = AEGPS = GEFDSW = AEFDDWL = EBF
p
0 Q
D = AR
Qm Qc
pc
MR
LMC
A
B C
D
pm E
F
G
Figure 22a: Monopoly and DWL
MonopolyΔCS = -GEHC - EBHΔPS = +GEHC - BHFΔSW = -EBH - BHF
H
4. Monopoly
But this is a static analysis - i.e. the instantaneous effects of monopolisation; what happens to cost over time, i.e. dynamic effects?
Two scenarios: (i) Liebenstein ‘X-Inefficency’ (pessimistic)
(ii) Schumpeter ‘R&D’ (optimistic)
Balance of argument - empirical issue
p
0 Q
D = AR
Qm Qc
pc
MR
LMC
A
B C
D
pm E
F
B
Schumpeter
Liebenstein
Figure 22a: Monopoly and DWL
4. Monopoly
To summarise; monopolies would appear to be harmful to society in sense that they lead to DWL (i.e. consumers lose more than producers gain)
Perhaps some benefits over time (R&D), but that is an empirical issue
There is an argument, however, that if we are to have monopolies, then we should make them as powerful as possible!
4. Monopoly
Price Discrimination (PD)
Selling different units of the same good at different
prices
Two basic approaches to PD:
Charging different prices to different consumers for same units of the good;
Charging same consumers different prices for different units of the good
4. Monopoly
Three main types of PD:
1. First-Degree (Perfect);
2. Second-Degree;
3. Third-Degree
Consider each in turn
4. Monopoly
First-Degree (Perfect) Price Discrimination
Monopolist charges each consumer maximum price willing to pay for each unit of the good; thus demand curve is also MR curve, since only reduce p on additional units of Q
Monopolist produces socially optimal Q (i.e. p = MC) and is thus allocatively efficient (DWL = 0) but completely inequitable (CS = 0)
p
0 Q
D = MR
1 2 Q*
LMC
PS
A
B
C
Figure 23: First Degree (Perfect) Price Discrimination
Perfect PDCS = 0PS = ABCSW = ABC
DWL = 0
p1
p2
p*
A'
A''
4. Monopoly
First-Degree (Perfect) Price Discrimination
Monopolist charges each consumer maximum price willing to pay for each unit of the good; thus demand curve is also MR curve, since only reduce p on additional units of Q
Monopolist produces socially optimal Q (i.e. p = MC) and is thus allocatively efficient (DWL = 0) but completely inequitable (CS = 0)
p
0 Q
D = MR
1 2 3 Q*
LMC
PS
A
F B
E
Figure 23: First Degree (Perfect) Price Discrimination
Perfect Price Discrimination
Price = ABCD; Quantity = Q*
CS = 0PS = ABESW = ABE
DWL = 0
p1
p2
p*
A1
A2
A3p3
D C
p
0 Q
D = MR
1 2 3 Q*
LMC
PS
A
B
E
Figure 23: First Degree (Perfect) Price Discrimination
Perfect Price Discrimination
Price = ABCD; Quantity = Q*
CS = 0PS = ABESW = ABE
DWL = 0
4. Monopoly
Second-Degree Price Discrimination
Monopolist knows there are different ‘types’ of consumers with different WTP (i.e. utility from consuming good) but cannot identify them individually
CSi(x) = ui(x) – p(x) i = H, L
uH(x) > uL(x) – i.e. H values good x more than L
p
0 x A C
xL xH
Figure 23: Second-Degree Price Discrimination
DH
DL
Consider two ‘packages’ vis:
(pH, xH)
(pL, xL)
Assume production is costless
D
B
p
0 x A C
xL xH
Figure 23: Second-Degree Price Discrimination
DH
DL
Ideally, monopolist would like to extract all CS. e.g.
pH = A + B + C
pL = A
D
B
p
0 x A C
xL xH
Figure 23: Second-Degree Price Discrimination
DH
DL
Such pricing will ensure zero CS vis:
pH = A + B + C
pL = A
=>
CSH(xH) = 0 = CSL(xL)
D
B
p
0 x A C
xL xH
Figure 23: Second-Degree Price Discrimination
DH
DL
D
But H prefers (pL, xL) to (pH, xH):
pH = A + B + C
pL = A
=>
CSL(xH) = - (B + C + D) < 0
CSH(xL) = B > 0B
p
0 x A C
xL xH
Figure 23: Second-Degree Price Discrimination
DH
DL
D
B
Thus, monopolist must remove B from (pH, xH):
pH = A + C pL = A
=>
CSH(xH) = B = CSH(xL)
CSL(xL) = 0
CSL(xH) = - (C + D) < 0
p
0 x A1 A2 C
xLL xL xH
Figure 23: Second-Degree Price Discrimination
B1 B2
DH
DL
Optimal packages? Consider cut in xL to xLL
=>
pH(xH) = A1 + A2 + B2 + C pL(xLL) = A1
D
p
0 x A1 A2 C
xLL xL xH
Figure 23: Second-Degree Price Discrimination
B1 B2
DH
DL
(xLL, xH) is still incentive compatible
=>
CSH(xH) = B1 = CSH(xL)
CSL(xLL) = 0
CSL(xH) = - (B2+ C + D) < 0
D
p
0 x A1 A2 C
xLL xL xH
Figure 23: Second-Degree Price Discrimination
B1 B2
DH
DL
Effect on profit?
=>
π(xH, xL) = (A1 + A2) + (A1 + A2 + C)
π(xH, xLL) = A1 + (A1 + A2 + B2 + C)
=>
Δπ = π(xH, xLL) - π(xH, xL) = - A2 + B2
D
p
0 x A1 A2 C
xL* xH*
Figure 23: Second-Degree Price Discrimination
B1
DH
DL
Optimal package is found by reducing xL until MC (i.e. in A2) equals MR (i.e. in B2)
pH(xH*) = A1 + A2 + B2 + C
pL(xL*) = A1
where
a-b = b-c
a
b
c
B2
D
4. Monopoly
Third-Degree Price Discrimination
Monopolist sells good at different prices to different groups of consumers
Monopolist must be able to identify distinct markets
Geographical, age, gender, race …
4. Monopoly
Assume monopolist sells identical good to two markets (A and B)
Assume costs of producing and supplying good to either market are identical
E.g. Cinema selling seats in Bath to students and lecturers who have distinct reservations prices and elasticities of demand from each other
p p p
0
0 0
Market A Market B Market A + B Lecturers Students
LMC
MRA
MRBARA
ARB
MR
AR
Figure 24a: Third-Degree Price Discrimination
4. Monopoly
Assume first that price-discrimination is illegal
The cinema will maximise profit by setting (aggregate) MR = LMC
Thus, sells seats in total at a common price of
to lecturers and to students
p p p
0
0 0
LMC
MRA
MRBARA
ARB
MR
AR
Figure 24b: Third-Degree Price Discrimination
Market A Market B Market A + B Lecturers Students
4. Monopoly
Assume now that price discrimination is legal
Setting a common price implies that MRA ≠ MRB
Thus, the monopolist can increase its revenue (and since production costs are independent of the market supplied, its profit) by transferring Q from the low MR market to the high MR market
p p p
0
0 0
LMC
MRA
MRBARA
ARB
MR
AR
Figure 24c: Third-Degree Price Discrimination
Market A Market B Market A + B Lecturers Students
4. Monopoly
As Q is withdrawn from the low MR market, p and MR in that market rise;
And vice versa, as Q is transferred to the high MR market, p and MR in that market fall; profit is maximised when MRA = MRB
p p p
0
0 0
LMC
MRA
MRBARB
ARB
MR
AR
Market A Market B Market A + B
4. Monopoly
Intuitively, lecturers have relatively inelastic demand, thus it is optimal to raise the price they face, since relatively little demand is lost
Conversely, students have relatively elastic demand, thus it is optimal to lower the price they face since demand increases substantially
4. Monopoly
Recall:
Thus:
4. Monopoly
Recall:
Thus:
If MRA = MRB, but EA < EB, then pA > pB
4. Monopoly
For all this to work:
1. Group making up sub-markets must have distinct elasticities of demand;
2. Third-degree price discrimination must be legal;
3. There must be no arbitrage between the groups (i.e. usually used in service industries)
p p
0 qb
pb
pa
ARb = Db ARa = Da
A K
B E G J M
D F H N
I L
C
Area No Price Discrimination (1)
Price Discrimination (2)
Change (2) – (1)
CSb +A +A+B+E+G +B+E+G
Rb +B+E+C+D+F +C+D+F+H -B-E+H
CSa +K+I+L +K -I-L
Ra +G+H+J+M+N +L+M+N -G-H-J+L
SW +A+B+C+D+E+F+G+H+I+J+K+L+M+
N
+A+B+C+D+E+F+G+H+K+L+M+N
-I-J
p
0 Q
D
Qm
Figure 23: Natural Monopoly
pm
LMC
LAC
MR
LAC
p
0 Q
D
QLAC Q*
Figure 23: Natural Monopoly
LMC
LAC
MR
p = LMC
p
0 Q
D
QMES
Figure 23: Monopoly and Perfect Competition
LAC
If demand is small relative to MES, A competitive market is likely to result
4. Monopoly
When is monopoly likely to happen?
Depends on minimum efficient scale and demand
p
0 Q
D
QMES
Figure 23: Monopoly and Competition
LAC
If demand is large relative to MES, A monopolistic market structure is possible
p
0 Q
D
Q*
Figure 23: Natural Monopoly
p* = LMC
LMC
LAC
MR
LAC
4. Monopoly
Finally …
Note that the monopolist does not have a supply curve
No one-to-one mapping between price and quantity supplied
p
0 Q
LMC
Q0 Q1
p0
AR1
MR0
MR1AR0
E0 E1
Figure 23: Monopolist does not have a supply curve