Less competition Perfect Competition Monopolistic Competition Oligopoly Monopoly

Less competition Perfect Competition Monopolistic Competition Oligopoly Monopoly

Profit Maximization for a Monopolist $ MC Economic π Profit maximizing condition: ATC P* MR = MC π = TR - TC ATC* TR = P *Q TC = ATC * Q D Q* Q MR

Comparison with Perfect Competition MC ≈ S $ P S P* PM D PPC Q* D QM QPC Q MR Price higher, quantity lower with a monopoly Q

Economies of Scale as an Entry Barrier $ LRAC 2 LRAC 1 Q 2 Q 1 Q

Lerner Index L = (P – MC) P Ex. – P = 20, MC = 14 (20 – 14) => L = = 0. 30 20 Higher L => more market power

Cross-Price Elasticity of Demand e. X, Y = %∆QY %∆PX e. X, Y => stronger substitutes => less monopoly power e. X, Y => weaker substitutes => more monopoly power

Concentration Ratios 20 20 10 10 5 5 5 1 1 1 CR 4 = 20 + 10 = 60 CR 8 = 20 + 10 + 5 + 5 = 90

Herfindahl-Hirschman Index (HHI) 20 20 10 10 5 5 5 1 1 1 HHI = 202 + 102 + 52 + 12 + 12 = 1280

Herfindahl-Hirschman Index (HHI) 20 20 20 HHI = 202 + 202 = 2000 25 20 20 20 15 HHI = 252 + 202 + 152 = 2050 10 10 10 HHI = 102 + 102 + 102 + 102 = 1000

20 20 10 10 5 5 5 1 1 1 HHIB = 1280 10 + 10 merger => 20 20 20 10 10 5 5 5 1 1 1 HHIA = 202 + 102 + 52 + 12 + 12 = 1480

20 20 20 10 10 5 5 5 1 1 1 HHIB = 1480 5 + 5 merger => 20 20 20 10 10 10 5 1 1 1 HHIA = 202 + 102 + 52 + 12 + 12 = 1530 ∆HHI = 50 < 100 => merger probably unchallenged

20 20 20 10 10 10 5 1 1 1 HHIB = 1530 20 + 20 merger => 40 20 10 10 10 5 1 1 1 HHIA = 402 + 202 + 102 + 52 + + 12 = 2330 ∆HHI = 800 => merger may be challenged 12

40 20 10 10 10 5 1 1 1 HHIB = 2330 20 + 10 merger => 40 30 10 10 5 1 1 1 HHIA = 402 + 302 + 102 + 52 + 12 + 12 = 2730 ∆HHI = 400 => merger will be challenged

40 30 10 10 5 1 1 1 HHIB = 2730 10 + 10 merger => 40 30 20 5 1 1 1 HHIA = 402 + 302 + 202 + 52 + 12 + 12 = 2930 ∆HHI = 200 => merger may be challenged

40 30 20 5 1 1 1 HHIB = 2930 40 + 1 merger => 41 30 20 5 1 1 HHIA = 412 + 302 + 202 + 52 + 12 = 3010 ∆HHI = 80 => merger will be unchallenged