10: Monopoly

Monopoly: 100% market power: eliminate or discipline a competitor or deter future entry by new competitors. Has the ability to influence price and the terms and conditions with which they sell their product.

  • Specific enterprise/individuals has sufficient control over a product/service to determine significantly the terms on which other individuals shall have access to it.

    • e.g. NHL/Egg Board/SaskEnergy/Bank of Canada/Dairy Farmers of Canada. Big dairy == Andrew Scheer???

    • Bank of Canada: monopoly on money production.

Assumptions

  • Price setter: alter the rate of production and sales which affects the market price. One firm: the only game in town.

  • Non-substitutable product: sells a product that cannot be easily substituted by another product. (compliment products)

  • Output is the industry output: the one firm’s output composites the full industry output.

  • Barriers to entry or exit: obstacles in the way of potential newcomers, e.g. Hudson’s Bay. Can be legislated, Ubers/Limos/Cabs at the airport.

    • Build barriers to entry to protect the fact that they’re the only firm.

Deriving Demand Curves

  • Downward sloping demand curve: you face the entire demand curve on your own. Perfectly elastic.

  • Draw the schedules out: we would get a downward sloping demand curve.

  • Demand curve is also your average revenue curve.

  • Marginal revenue is not the same line as demand or average revenue. Instead, it lies underneath the demand curve. Always intersect the x-axis at the mid-point of where the demand curve intercepts.

    • Mid-point of the x-intercept and the demand curve. Steeper downward slope.

  • Draw out the cost curves. Super impose the marginal cost curve onto the demand curve.

  • Like all other firms, they choose to produce where their marginal revenue equals their marginal costs. They’re going to set the price where the consumer is willing to pay.

  • Impose the average total cost curve.

  • MC = S

Calculating profits:

pi = TR - TC

pi = PQ - ATC*Q

  • If the price is larger than the average total cost, then this firm is making a profit.

  • The area is known as the monopoly profits.

Produce or not to produce: if P > AVC, then you produce. If P < AVC, then shut down.

How much to produce: MR = MC

Market Structure: Taker where P = D = AR = MR

  • Setter where P = D = AR =/= MR.

Can they lose money?

  • Yes: if their average total costs go up. And if the government legislates that I can’t change my price, then yes, I’m losing money.

  • Or if the demand structure shifts in. It could even shift in to such an extent that I’m losing money that I’m below my average total costs: shut down.

  • Canada Post: costs are rising, demand is shifting inward. Profits are getting squeezed.

Why do we allow monopolies:

  • Sometimes we allow them to come about.

Monopoly profits signal for firms to try and enter:

If P > ATC, then we get profit and new entrants try to enter.

When P < AVC, firms exit and shut down.

Get the politicians to establish an illegitimate barrier to entry.

Cartels: they have a territory that they are in charge of; they supply the drugs for that area. Violence as a barrier to entry.

  • A form of collusion between a group of suppliers aimed at suppressing competition between themselves, wholly or in part.

  • Each cartel fights for different geographic areas.

  • If you allow somebody to breach the barrier to entry, you are no longer the only output.

Canada: dairy farmer cartel lobbyists.

Legislated barriers to entry: banning guns barring one brand.

OPEC cartel: controlling most of the world’s oil production.

Diamond cartel: manufactured scarcity. Lab-grown diamonds? 

Price Discrimination

  • Single price monopolist: set the price. Short the market, set the higher price.

  • Price discriminate by releasing only a little bit of the product and asking you to pay more. Expansion of the monopoly profits.

  • In a normal market, the consumer surplus is maximized. We get what we want.

  • In a monopoly, we get short-changed and we pay a higher price. The consumer surplus gets squeezed. The producer surplus gets expanded — sucking it up to become profit. We have a dead-weight loss.

  • Price discrimination is an iterative process.

  • In a perfectly price discriminative behaviour, there is no consumer surplus and no deadweight-loss

  • More often in travel, pharmaceuticals and textbook publishers. Coupons, age discounts, incentives, gender-based pricing and financial aid.

  • Flipping it: discounts.