Prices and Markets – ECON1194

Topic 6: Monopoly
 3G Internet
• Vietnamese government requests controlling the
increasing in 3G fee
• Increasing in 3G fee because network companies have
uncontrollable authorities

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 Topic 6: Monopoly
• Outline

1 Characteristics of Monopoly Market

2 Monopolist’s Output and Pricing Decision

3 Monopoly: Summary

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 Topic 6: Monopoly 2
4 Economic Effects of Monopoly
5 The Debate about Monopoly
6 Price Discrimination

7 Government regulation and intervention

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 1.What are the characteristics of a
monopoly market?
Work with the person next to you to answer
• Concentration: …………………………………
• Product differentiation: ……………………….
• Barrier to entry: ……………………………….

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 1.What are the characteristics of a
monopoly market? 2
o The fundamental cause of monopoly is barriers to
entry – a monopoly remains the only seller in its
market because other firms cannot enter the market
to compete with it.
• Can earn excess profits even in the long-run

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 1.1 Sources of Monopoly Power
1. Resource-based monopolies
o When a single firm owns a key resource for a
product.
o For e.g. the market for water. If a single firm owns the
dams that supply water to a town, then that firm has
a monopoly on water.
o Monopoly resources are rare. Economies are large
and resources are owned by many people
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 1.1 Sources of Monopoly Power 2
2. Government-created (legal) monopolies
o When the government gives one person or firm the
exclusive right to sell a good or service.
o For e.g. a patent grants an inventor the exclusive
right to manufacture and sell their invention and
copyright laws grant a writer monopoly control over
the sale of their work.

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 1.1 Sources of Monopoly Power 3
o The benefits of patent and copyright laws are the
increased incentives for creative activity. However,
because these laws give one producer a monopoly,
they lead to higher prices than under competition.

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 1.1 Sources of Monopoly Power 4
3. Natural monopolies
o Definition:
……………………………………………………………
o Example:
…………………………………………………….

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 Clicker Exercise
EVN is most likely a:
1. Natural monopoly.
33% 33% 33%
2. Resources based monopoly.
3. Government created monopoly.

1 2 3

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 1.2 Monopoly vs. Perfect
Competition
• Q: What is the key difference between a
competitive market firm and a monopoly?

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 1.2 Monopoly vs. Perfect Competition 2

P P Demand curve for a

Demand curve for a Price taker
Price maker D

D
Qty Qty

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 1.2 Monopoly vs. Perfect
Competition 3
• Ans: the ability to influence the price of its output
o Remember under perfect competition, firms are the
price takers. They take the price at the market
equilibrium as given hence the demand curve for a
firm under perfect competition is perfectly elastic or
horizontal

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 1.2 Monopoly vs. Perfect
Competition 4
o Since there is only a single seller, the monopolist
can decide the price of their product to maximize the
profit or price marker.
o The demand curve for a monopoly firm is the same
as the demand curve for a market since there is only
1 seller.

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 2.Monopolist’s Output and Pricing
Decision
• To maximise profits the monopolist must know the
characteristics of market demand, as well as its costs
o The price the monopolist charges follows directly
from the market demand curve OR
o The monopolist sets the price, and the quantity that
can be sold follows from the market demand curve

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 2.Monopolist’s Output and Pricing
Decision 2
• Monopolist will choose output to maximise

total profits = ……………………………………

• But does this mean the monopolist is a ‘price-maker’? A
monopolist cannot charge as high a price as it wants, at
least if the monopolist want to maximise profits

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 2.Monopolist’s Output and Pricing
Decision 3
• Profit maximization is at QB where the difference
between the TR and TC is the greatest
• Note that the TR is concave (Why?) and is upward
sloping from O to Qc and downward sloping from Qc
onwards (Why?)

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 2.Monopolist’s Output and Pricing Decision
4

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 2.Monopolist’s Output and Pricing Decision
5

• What P and Q for the monopolist to maximize

profit?

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 2.Monopolist’s Output and Pricing
Decision 6
P Q TR TC MR MC 
Example:
$10 0 0 0 - - 0
$6 1 6 2 6 2 4
$5.5 2 11 5 5 3 6
$5 3 15 9 4 4 6
$4.5 4 18 14 3 5 4
$4 5 20 20 2 6 0
$3.5 6 21 27 1 7 -6
$3 7 21 35 0 8 -14

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 2.1. Demand and Marginal
Revenue Curves
• Marginal Revenue is half of the distance from the price
axis to the demand curve. Or it is twice as steep as the
demand curve

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 2.1. Demand and Marginal Revenue Curves
2
$ Elastic

Unitary
elastic
Inelastic

MR
D Qty
$

TR
Qty

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 2.1 Demand and Marginal
Revenue Curves
Example:
Demand Curve: Qd = 5 – P P=5–Q
Total Revenue: P  Q = (5 – Q)  Q = 5Q – Q2

Marginal Revenue: change in total revenue when one

more unit is sold = rate of change of total revenue
curve TR TR  (5Q  Q 2 )
MR     5  2Q
Q Q Q

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 2.1 Demand and Marginal Revenue Curves
2

P MR= 5 - 2Q
5

P = 5 - QD

Q
2.5 5

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Clicker Exercise

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 Marginal revenue for a monopolist
is equal to:
1. The incremental revenue from selling an additional
unit less the loss of revenue from selling previous units at
a lower price.
2. The change in revenue resulting from a one unit
change in output.

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 Marginal revenue for a monopolist
is equal to: 2
25% 25% 25% 25%
3. The change in revenue
divided by the change in output.
4. All of the above.

1 2 3 4

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Clicker Exercise: For a monopolist

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 Marginal revenue is always less
than price because:
1. profit margins fall at lower prices.
2. in order to sell additional quantities, the additional units
must be sold at a lower price.

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 Marginal revenue is always less
than price because: 2
3. as output increases, the price of all units must fall to
25% 25% 25% 25%
sell the additional unit.
4. All of the above.

1 2 3 4

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 2.2 Profit Maximization
• Once knowing the profit-max output, then the price to
be charged can be determined from the demand curve
MC

P B
M

A
D
M
QM R

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 2.2 Economic Profits
What does this MC
 = (P - ATC)  Q area show?
ATC
p >0
B
p when P > ATC PM

AT
C
A
D

MR
0
QM Qty

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 2.2 Short-run Loss Minimization
•  = (P - ATC)  Q
•  < 0 when P < ATC
• Only produce if P > AVC

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 2.2 Short-run Loss Minimization
MC
2
ATC
Loss MC

AVC

B
PM

What
does this
area A
show? D
MR
0
QM Qty

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 3.Monopoly: Summary
• A monopolist will not charge the highest price possible.
Why?
• A monopolist will not maximize profit per units but total
profits, that is where MR = ?

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 3.Monopoly: Summary 2

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 3.Monopoly: Summary 3
• Monopolies are not always making profit, losses are
possible:
o Monopoly does not guarantee economic profits
o In the short-run, monopolist may experience losses
because of …… or ……….
• No supplier will produce an output corresponding to the
inelastic section of the demand curve.

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 4.Economic Effects of Monopoly
• The monopolist charges a higher price (pM) and

produces a smaller quantity (qM) compared to the ATC

competitive industry (pC, qC)

• For perfect competitive market, productive efficiency

and allocative efficiency are realised

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 4.Economic Effects of Monopoly 2
• For monopoly, allocative efficiency is NOT realised
(p = MB > MC)
ATC
• And productive efficiency is not realised either (not
min ATC)

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 4.Economic Effects of Monopoly 3

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 4.Economic Effects of Monopoly 4
• The welfare loss is similar to that caused by price
ceilings, price floors and taxes.

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 4.Economic Effects of Monopoly 5

b c
e d

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 4.Economic Effects of Monopoly 6
• Work in pair:

CSc = ………

PSc = ………

CSm = ……..

PSm = ……….

 TS =  CS +  PS = ……. = D.W.L

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 4.Economic Effects of Monopoly 7
• Alternatively:

At Qm, the value to buyers exceeds the

MC of providing the good, so increasing

output would raise total surplus

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Clicker Exercise

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 The allocative inefficiency of
monopoly arises from the fact that:
1. price exceeds marginal cost.
2. output falls short of the output at which average cost is
minimized.
3. output exceeds the output at which average cost is
minimized.

4. price exceeds minimum average cost.

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 The allocative inefficiency of monopoly arises from the fact that: 2

25% 25% 25% 25%

1 2 3 4

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 5. The Debate about Monopoly
• The market power of monopolies (and large firms
generally) may have certain economic benefits that
weight against the deadweight loss, which may in
practice not be as serious as in theory.
o small estimated welfare loss of monopoly (Arnold Harberger)
o Innovation, research and development (Joseph Schumpeter)
o contestability (William J. Baumol)
o efficiency hypothesis (Harold Demsetz)

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 5. The Debate about Monopoly 2
• Does the monopoly’s profit impose a social cost?
o A monopolist’s profit is not in itself necessarily a
problem for society. After all, producer surplus is a
part of the total surplus.
o However if a monopoly firm has to incur additional
costs to maintain its monopoly position, then these
costs are a part of the social loss from monopoly.

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 6. Price Discrimination
• Price discrimination is the business practice charging
different prices to different customers that are not
based on differences in costs of production.
o The objective is to capture consumer surplus by
transferring it from consumers to the producer(s).

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 6. Price Discrimination 2
o Three requirements for successful price
discrimination:

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 6. Price Discrimination 3
1. Firms must possess some degree of market
power;
2. Firms must be able to separate customers into
different groups according to their willingness to
pay; and
3. Firms must be able to prevent arbitrage among
the different group of customers.

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 6. Price Discrimination 4
• How does it work?
Would it bother
you to hear how
little I paid for this
flight?

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 6. Price Discrimination 5
For e.g. airlines. Fixed cost $200,000 for each flight and a
marginal cost of zero.
Two groups of passengers: 100 business people willing to
pay $5000 each and 200 students willing to pay $1000
each.

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 6. Price Discrimination 6
If ticket is priced at $5000, will sell 100 for a profit of $
300,000 (DWL = $200,000)
If ticket is priced at $1000, will sell 300 for a profit of $
100,000 (no DWL)
Now suppose that the two types of passengers are
located in separate markets.

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 6. Price Discrimination 7
The airline could charge business people $5000 (selling
100) and charge students $1000 (selling an additional
200).
Now the airline makes a profit of $500,000 and there is no
DWL.

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 6. Price Discrimination 8
There are 3 types of price discrimination:
1. First Degree (Perfect) Price Discrimination
• Definition:…………………………………………………

example: sealed auctions

o How successful they are depends on their ability to

determine exactly how much each customer is willing to
pay and price accordingly

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 6. Price Discrimination 9
2. Second Degree Price Discrimination
• Definition:…………………………………………………

example: discounts coupons, loyalty cards

o Producers induce customers to self-select - sort

themselves out according to their willingness-to-pay

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 6. Price Discrimination 10
3. Third Degree Price Discrimination
• Definition:…………………………………………………

example: airline tickets for business and

holiday travellers

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 7.Government Regulation and
Intervention
• Competition policy
• Regulation

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 7.Government Regulation and
Intervention
1. Competition Policy
• Competition laws are a part of competition policy, the
laws and procedures that aim to improve social
efficiency in monopolistic and oligopolistic markets.

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 7.Government Regulation and
Intervention 2
o E.g. Vietnam Competition Law 2004 or the
Competition and Consumer Act - Australian
competition law that controls mergers and prevents
monopolists from abusing their market power to
restrict or harm competition

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 7.Government Regulation and
Intervention 3
2. Regulation
• In certain cases, e.g. natural monopolies, increasing
competition will increase the ATC of production and
hence, not desirable.
• In these cases, government regulate their prices, to
prevent them from charging high prices.

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 The Economic Regulation of
Monopoly: marginal cost pricing
P
$60 MC SET THIS AS THE
PRICE CEILING!
Allocative
efficiency is
ATC achieved! So what
happen to DWL?
42 But not
P=MC PRODUCTIVE
efficiency
32
Monopolist still
makes a profit
MR Demand
0
6 10
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 The Economic Regulation of
Monopoly: Average cost pricing
Demand
Monopoly
price
MR MC
PM
Regulated
Profit price
ATC
PR
Loss Efficient
PE price

0 QM QR Quantity
QE
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 8. Discussion
ELECTRICITY RATES CHARGED IN VIETNAM FOR RESIDENTIAL FROM
MARCH 2015
VND per Kwh
From 0 – 50 Kwh 1484
51 – 100 Kwh 1533
101 – 200 Kwh 1786
201 – 300 Kwh 2242
301 – 400 Kwh 2503
401 and above 2587

• Does EVN practice second-degree price

discrimination? Yes or no and why?
• What might be the reasons for EVN to come up with
different rates?

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