Author: John Bouman

Monopoly Profit-Maximization by Analyzing a Table Consider the following table with cost and revenue data for a hypothetical monopolist: Quantity TFC TVC TC AVC ATC MC Price Total Revenue Marginal Revenue 0 5,000 0 5,000 – – – 38 0 – 100 5,000 3,000 8,000 30 80 30 37 3,700 37 200 5,000 5,000 10,000 25 50 20 36 7,200 35 300 5,000 6,000 11,000 20 36.67 10 35 10,500 33 400 5,000 6,800 11,800 17 29.50 8 34 13,600 31 500 5,000 8,000 13,000 16 26 12 33 16,500 29 600 5,000 10,000 15,000 16.67 25 20 32 19,200 27 700 5,000 13,000 18,000 18.57 25.71 30 31 21,700 25 800 5,000 16,500 21,500 20.63 26.88 35 30 24,000 23 900 5,000 22,000 27,000 24.44 30 55 29 26,100 21 Problem: What are the profit-maximizing output and price for the above monopolist? What is the profit at this output? What is the average profit at this output? Solution: Like the purely competitive firm, a monopolist maximizes profits at the quantity where marginal cost and marginal revenue are equal, or where marginal cost comes closest to marginal revenue, as long as marginal cost does not exceed marginal revenue, marginal cost is not falling, and price exceeds average variable cost. Applying the profit-maximizing rule, we conclude that the firm maximizes profits at Quantity = 600 units Price = $32 Profit...

The History of Anti-trust Legislation Anti-trust laws are meant to promote competition and limit monopoly forming. Listed below are the main anti-trust legislation acts passed in the United States. Other industrialized countries have similar laws. 1. The Sherman Act of 1890. The Sherman Act was the first important anti-trust (anti-monopoly) law passed in the United States. This act outlaws all contracts, combinations, and conspiracies that unreasonably restrain interstate and foreign trade. If two or more companies sign a contract to fix prices, rig bids, or allocate consumers, they are in violation of the Sherman Act. Individuals can be fined up to $350,000 (and up to ten years in prison) and corporations can be fined up to $10 million for each offense. 2. The Clayton Act of 1914. The Clayton Act expanded on the Sherman Act and more clearly defined anti-competitive practices. Specifically, the Clayton Act prohibits the following: 1. Price discrimination, local price cutting and price fixing, if it leads to monopoly-forming. Price discrimination is when a firm charges different prices to different buyers. Some price discrimination is legal; for example, when a movie theater sells tickets at a discount to senior citizens. It is not legal to price discriminate on the basis of race, gender, ethnicity, etc. It is also not legal if a firm charges a different price to different companies unless justified by different costs (transportation,...

What’s in This Chapter? Monopolistically competitive industries and oligopoly industries are common market structures. This unit gives examples of each, and explains that in most of these industries, there is a significant amount of competition. In each industry structure, it is unlikely that a firm will charge exorbitant prices and make excessive profits in the long run. Even in oligopoly industries, there is a significant degree of actual and potential competition (unless the companies collude). Game theory is a relatively new branch of economics, which sheds light on firms’ behavior under various competitive circumstances. It has useful applications, especially in oligopoly...

Monopolistic Competition and Oligopoly So far, we have discussed two market structures, pure competition and monopoly. These are the two extremes. Pure competition is the most competitive, and monopoly the least competitive. The two market structures discussed in this unit are in between these two extremes. We will first discuss monopolistic competition. Then we will discuss oligopoly in a later section. Characteristics of Monopolistic Competition Four characteristics of a monopolistically competitive industry are: 1. Many sellers. There are many sellers in this industry. Thus, there is a lot of competition. 2. Easy entrance. Firms in monopolistic competition are small. It’s relatively easy for new firms to enter this industry and for existing firms to exit. Barriers to entry and exit are low. 3. Differentiated products. Firms in this industry sell differentiated products. Unlike in perfect competition, products are not identical. 4. Local Advertising. Firms in this industry frequently advertise. Because the firms are small, this is usually done on a local level. Characteristics 1 and 2 are the same as in perfect competition. Characteristic 3 means that firms in this industry sell products that are similar but slightly different. The difference may be in the packaging of the product, the ingredients, the service associated with the product, the name of the product, etc. It is also possible that there may not be real differences, but only perceived differences by...

The Profit Maximizing Price and Quantity in the Short Run Firms in monopolistic competition face a downward sloping demand curve. The demand curve is flatter (closer to horizontal, or more elastic) compared to the demand curve of the pure monopolist. The graph below illustrates the profit-maximizing price and quantity for a monopolistically competitive firm in the short run. The firm maximizes profits at the quantity where marginal cost equals marginal revenue (at a quantity of 400). The price is found by going straight up to the demand curve, so the profit-maximizing price is $7. At the profit maximizing quantity of 400, average total cost is $6. This means that the firm is making an economic (above-normal) profit. Average profit is $7 minus $6, or $1. This means that total profit is $400 (400 times $1). Because there are low barriers to entry into monopolistic competition, a firm is not expected to make economic (above-normal) profits in the long run. If a firm is making above-normal profits, then in the long run, existing firms will increase supply, and new firms will enter this industry to take advantage of the lucrative conditions. The increase in the supply will lower the price. This will lower the original firm’s profits back to a normal level (normal accounting profits, but zero economic profits). The opposite occurs when firms lose money. The weaker firms that...