How Does the Government
Regulate Monopolies?
DO NOW: If a government permits a
monopoly to exist, how much should
they let it charge?
Conclusion: A monopoly produces where MR=MC,
but charges the price set by the demand curve.
How much is the TR, TC and Profit or Loss?
P
MC
$10
9 Profit =$20
8
7
6
5
16 17 18 19 20
ATC
D
MR
Q
2
Elastic and Inelastic Range
P
Total Revenue Test
If price falls and TR
increases then
demand is elastic.
Elastic
Inelastic
$15
10
5
D
Q
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
TR
Total Revenue Test
If price falls and TR
falls then demand is
inelastic.
$64
40
20
MR
A monopoly
will only
produce in
the elastic
range
TR
Q
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
3
I. Regulating
Monopolies
4
Why Regulate?
Why would the government regulate an
monopoly?
1. To keep prices low
2. To make monopolies efficient
How do they regulate?
•Use Price controls: Price Ceilings
•Why don’t taxes work?
•Taxes limit supply and that’s the problem
5
Where should the government place
the price ceiling?
1.Socially Optimal Price
P = MC (Allocative Efficiency)
OR
2. Fair-Return Price (Break–Even)
P = ATC (Normal Profit)
6
Natural Monopoly
One firm can produce the socially optimal quantity
at the lowest cost due to economies scale.
P
It is better to have only
one firm because ATC is
falling at socially optimal
quantity
MC
ATC
MR
D
Qsocially optimal Q
7
Natural Monopoly
Unregulated
P
Fair Return
Socially Optimal
(No DWL)
PM
MC
PFR
ATC
QSO
MR
QM
D
QFR Qsocially optimal Q
8
Regulating a Natural Monopoly
What happens if the government sets a price ceiling
to get the socially optimal quantity?
P
The firm would make a
loss and would require a
subsidy
MC
ATC
Pso
MR
D
Qsocially optimal Q
9
2008 Audit Exam
II. Perfect Price
Discrimination
11
Price Discrimination
Price Discrimination:
Practice of selling the same products to
different buyers at different prices
Examples:
•Airline Tickets (vacation vs. business)
•Movie Theaters (child vs. adult)
•All Coupons (spenders vs. savers)
•Syracuse football an basketball games
(students vs. parents)
12
Price Discrimination
•Price discrimination seeks to charge each
consumer what they are willing to pay in an
effort to increase profits.
•Those with inelastic demand are charged
more than those with elastic
Requires the following conditions:
1. Must have monopoly power
2. Must be able to segregate the market
3. Consumers must NOT be able to resell
product
13
P
Qd
$11
0
TR MR
0
-
14
Results of Price
Discrimination
$10
P
Qd
$11
$10
0
1
TR MR
0
10
10
15
Results of Price
Discrimination
$10
P
Qd
$11
$10
$9
0
1
2
TR MR
0
10
19
10
9
$10 $9
16
Results of Price
Discrimination
$10
$10 $9
$10 $9
P
Qd
$11
$10
$9
$8
0
1
2
3
TR MR
0
10
19
27
10
9
8
$8
17
Results of Price
Discrimination
$10
$10 $9
$10 $9
$8
$10 $9
$8
P
Qd
$11
$10
$9
$8
$7
0
1
2
3
4
TR MR
0
10
19
27
34
10
9
8
7
$7
18
Results of Price
Discrimination
$10
$10 $9
$10 $9
$8
$10 $9
$8
$7
$10 $9
$8
$7
$6
$10 $9
$8
$7
$6
$5
$10 $9
$8
$7
$6
$5
P
Qd
$11
$10
$9
$8
$7
$6
$5
$4
0
1
2
3
4
5
6
7
TR MR
0
10
19
27
34
40
45
49
10
$9
$8
$7
$6
$5
$4
$4
19
P
$10 $9
$8
$10 $9
$8
$10 $9
$8
$11
$10
$9
$8
WHEN PRICE
$7
DISCIMINATING
$6
$7 MR = D $5
$4
$7 $6
$10 $9
$8
$7
$6
$5
$10 $9
$8
$7
$6
$5
$10
$10 $9
Qd
0
1
2
3
4
5
6
7
TR MR
0
10
19
27
34
40
45
49
10
$9
$8
$7
$6
$5
$4
$4
20
Regular Monopoly vs.
Price Discriminating Monopoly
P
MC
Pm
ATC
D
MR
Qm
Q
21
A perfectly discriminating can charge each person
differently so the Marginal Revenue = Demand
P
MC
ATC
D
MR
Q
22
A perfectly discriminating can charge each person
differently so the Marginal Revenue = Demand
Identify the Price, Profit, CS, and DWL
P
MC
ATC
D =MR
Qnm
Q
23
A perfectly discriminating can charge each person
differently so the Marginal Revenue = Demand
Identify the Price, Profit, CS, and DWL
P
MC
ATC
D =MR
Price Discrimination results in several
prices, more profit, no CS, and a higher
socially optimal
quantity
Q
Q
nm
24
Can You Do The Following?
1.Draw a monopoly making a profit at
long-run equilibrium and identify price,
quantity, and profit.
2. Draw a perfectly competitive
industry AND firm at long-run
equilibrium
3. Draw a price discriminating
monopoly at equilibrium and label
price, quantity, MR, and profit
25