1. business and industrial
2. company
3. earnings

Chapter 11
PURE MONOPOLY
Learning objective
LEARNING OBJECTIVES
On completing this chapter you should be able to:
er
11.1 Review the nature of barriers to entry into an industry, and
their form and likely occurrence.
pl
e
11.4 Compare the outcome of a monopoly industry–in terms of
allocative and productive efficiency–with that of a perfectly
competitive industry.
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a
11.3 Understand how monopoly adjusts price and output in shortrun and long-run situations.
pt
11.2 Examine demand from a monopolist’s viewpoint.
Sa
m
11.5 Discuss whether government can play a role in modifying
monopoly behaviour.
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INTRODUCTION
ch
a
pt
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We now move from pure competition to the opposite end of the industry range–
pure monopoly. In this chapter we examine the characteristics, bases, price–output
behaviour and social desirability of the pure monopoly model. Does the monopolist
achieve the allocative and productive efficiency observed in perfect competition?
As we saw in Chapter 8, absolute or pure monopoly exists when a single firm is
the sole producer of a product for which there are no close substitutes. By definition,
there will be no other firms producing the same product or products that vary only
in very minor ways from that of the monopolist. For example, there is no close
substitute for water supplies. Nor is there a good substitute for regular postal
services. On the international scene, the De Beers diamond syndicate controls much
of the world’s supply of diamonds. In small and geographically isolated towns, the
single local hardware store or cinema may approximate pure monopoly.
Pure monopoly is a rare phenomenon, but the study of pure monopoly is
important for at least two reasons:
Sa
m
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• Some industries are reasonable approximations of monopoly. Often, we can
explain, with considerable accuracy, the behaviour of firms with 80 or even 70 per
cent of a market through the pure monopoly market model.
• A study of pure monopoly gives us valuable insights into the more realistic market
structures of monopolistic competition and oligopoly (which will be discussed in
Chapters 12 and 13). These two market situations combine in differing degrees the
characteristics of perfect competition and pure monopoly.
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BARRIERS TO ENTRY
pure monopoly a
one-firm industry, where
a single firm is the only
producer/supplier of a
given product/service.
Barriers to entry any
obstacles that prevent
the entry of firms into
an industry.
In Chapter 8 we noted that pure monopoly is characterised by the absence of competitors, and this absence
can largely be explained in terms of barriers to entry into an industry. Such barriers prohibit additional
firms from entering an industry. Barriers to entry imply the presence of monopoly power in a market.
These barriers are also important in explaining the existence of oligopoly and monopolistic competition
between the market extremes of perfect competition and pure monopoly.
In pure monopoly, entry barriers completely block all potential competition. Less formidable barriers
permit the existence of oligopoly–that is, a market dominated by a few firms. Weaker barriers permit the
fairly large number of firms that characterises monopolistic competition. The absence of entry barriers
helps explain the very large number of competing firms that forms the basis of perfect competition. The
point to observe is that barriers to entry are relevant both to the extreme case of pure monopoly, and also
to the ‘partial monopolies’ that are so characteristic of Australian capitalism.
pt
Natural
monopoly occurs
in industries whose
technological and
economic realities rule
out the possibility of
competitive markets.
In many industries, modern technology requires that efficient, low-cost production can be achieved
only if producers are extremely large both absolutely and in relation to the market. Where economies
of scale are very significant, a firm’s average cost schedule will decline over a wide range of output (see
Figure 9.7(a)). For a particular market demand, achieving low unit costs (and therefore low unit prices
for consumers) depends on the existence of a small number of firms or–in the extreme case–only one
firm.
The motor vehicle and steel industries are among the many heavy industries that reflect such
conditions. Let’s say three firms (the ‘Big Three’) currently enjoy all available economies of scale and each
has approximately one-third of a market. Small-scale producers entering the market have little chance to
survive and expand. They will be unable to realise the cost economies enjoyed by the existing ‘Big Three’
and unable to obtain the profits necessary for survival and growth. New competitors in the steel and motor
vehicle industries will not emerge from the successful operation and expansion of small producers–they
will not be efficient enough to survive.
The other option is to start out big–that is, to enter the industry as a large-scale producer. In practice, this
is very difficult. It is unlikely that a new and inexperienced firm will be able to secure the money capital
needed to obtain capital facilities comparable to those of the ‘Big Three’. The financial obstacles in the way
of starting big are usually so great that they are prohibitive.
In some industries, economies of scale are significantly prominent at all possible output levels.
Competition is impractical, inconvenient or simply unworkable. Such industries are called natural
monopolies. Most of the formerly public utilities in Australia–the electricity and gas supply industries,
railways, water and communication facilities–can be classified in this way.
OWNERSHIP OF ESSENTIAL RAW MATERIALS
ch
a
Economies of
scale the forces that
reduce the average cost
of producing a product
as the firm expands the
size of its output in the
long run.
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ECONOMIES OF SCALE
m
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Private property can be used by a monopoly as an effective obstacle to potential rivals. A firm owning or
controlling an essential raw material can withhold its availability and thus prohibit the creation of rival
firms. Therefore other firms have little chance of entering that industry (unless new resource supplies or
substitutes are discovered). There are several typical examples of monopolistic ownership.
world’s known nickel reserves.
Sa
• In the 1940s and 1950s, BHP controlled all the known available iron ore deposits in Australia.
• The International Nickel Company of Canada (INCO) once controlled approximately 90 per cent of the
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• Most of the world’s known diamond mines are owned or effectively controlled by the De Beers Company
of South Africa.
LEGAL BARRIERS
Patent and copyright laws give inventors the exclusive right to control a product for some specified period
of years. These laws are aimed at protecting inventors from their product or process being appropriated by
rival enterprises that have not shared in the time, effort and money outlays of the product development.
Patents also provide the inventor with a monopoly position for the life of the patent. Patents and
copyrights have been important to many modern-day international industrial giants–such as, 3M, Sony
and Microsoft.
Research underlies the development of patentable products. Firms that gain a measure of monopoly
power by their own research (or by purchasing the patents of others) are in a strategic position to
consolidate and strengthen their market position. The profits provided by one important patent may
be used to finance the research that is required to develop new patentable products. Monopoly power
achieved through patents and copyrights may be cumulative.
TWO IMPLICATIONS
Our discussion of barriers to entry suggests two notable points.
• The rarity of pure monopoly: Barriers to entry are rarely completely effective. Research and technological
advance may strengthen the market position of a firm, but technological advance may also undermine
existing monopoly power. Existing patent advantages may be circumvented by the development of new
and distinct, yet substitutable, products. Additionally, new sources of strategic raw materials may be
found. We could say that monopoly in the sense of a one-firm industry can persist over time only with
the sanction or aid of government (e.g. postal services fit into this category).
• Desirability: We implied that monopolies may be either desirable or undesirable from the standpoint
of economic efficiency. The arguments regarding public utilities and economies of scale suggest that
market demand and technology signify efficient low-cost production as a characteristic of monopoly.
However, our comments on materials ownership, patents and copyrights as sources of monopoly point
to the more undesirable elements of monopoly.
pt
11.1
Sa
m
pl
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ch
a
• Barriers to entry exist in the following forms:
– economies of scale, requiring substantial investment and therefore operation at high levels of
output to achieve low-cost production–natural monopolies provide extreme examples of this
type of entry barrier
– the ownership or control of essential raw materials, preventing competitors from acquiring
the necessary inputs to compete in the market
– patent ownership and research and licences that provide a legal barrier to entry and provide
the owner with exclusive rights to use an idea, process or technology.
• Barriers to entry help to explain the existence not only of pure monopoly but also of other
imperfectly competitive market structures.
• Barriers to entry that are very formidable in the short run may prove to be surmountable in the
long run due to technological and regulatory changes over time.
er
Learning objective
Checkpoint
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MONOPOLY DEMAND
ASSUMPTIONS
We begin our analysis of the price–output behaviour of a pure monopolist with three assumptions:
1. The monopolist’s position is guaranteed by, say, patents or control over raw materials.
2. There is no prospect of government takeover or a government agency regulating the firm.
3. At any output level, the firm sells all that output at the same price. The monopolist does not discriminate
between buyers by charging them different prices.
OVERVIEW
The crucial difference between a pure monopolist and a purely competitive seller lies on the demand side
of the market. Recall from Chapter 10 that the purely competitive seller faces a perfectly elastic marginal
revenue line (or ‘demand’ schedule) at the market price–determined by industry supply and demand. The
competitive firm is a ‘price taker’ that can sell any amount at the current market price. Each additional
unit sold will add a constant amount–that is, its price–to the firm’s total revenue. In other words, marginal
revenue is constant and equal to product price. This means that total revenue increases by a constant
amount–that is, by the constant price of each unit sold. (Looking back at Table 10.1 and Figure 10.1 will
remind us the price, marginal revenue, and total revenue relationships of the perfectly competitive firm.)
The monopolist’s demand curve–and the demand curve for any imperfectly competitive seller–is very
different. The pure monopolist is the industry. Therefore, its demand (sales) curve is the industry demand
curve. The market (industry) demand curve is in fact downward-sloping. This is illustrated in columns 1 and 2
of Table 11.1. There are three implications of a downward-sloping demand curve that must be understood.
PRICE EXCEEDS MARGINAL REVENUE
With a downward-sloping demand curve, the pure monopoly can increase its sales only by charging a
lower unit price for its product. Because the monopolist must lower price to boost sales, marginal revenue is less
than price (average revenue) for every level of output except the first. Why? Price cuts will apply both to the extra
output sold, and also to all other units of output that could otherwise have been sold at a higher price. Each
TABLE 11.1 REVENUE AND COST DATA OF A PURE MONOPOLIST (HYPOTHETICAL DATA)
REVENUE DATA
4
8
PROFIT
(ⴙ) OR
5
6
7
MARGINAL
COST ($)
PRICE
(AVERAGE
REVENUE) ($)
TOTAL
REVENUE ($)
MARGINAL
REVENUE ($)
AVERAGE
TOTAL
COST ($)
TOTAL
COST ($)
0
1
2
3
4
5
6
7
8
9
10
172
162
152
142
132
122
112
102
92
82
72
0
162
304
426
528
610
672
714
736
738
720
162
142
122
102
82
62
42
22
2
–18
190.00
135.00
113.33
100.00
94.00
91.67
91.43
93.73
97.78
103.00
100
190
270
340
400
470
550
640
750
880
1030
90
80
70
60
70
80
90
110
130
150
Sa
m
pl
e
QUANTITY
OF
OUTPUT
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3
pt
2
LOSS (ⴚ)
($)
ch
a
1
COST DATA
⫺100
⫺28
⫹34
⫹86
⫹128
ⴙ140
⫹122
⫹74
⫺14
⫺142
⫺310
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additional unit sold will add to total revenue its price less the sum of the price cuts that must be taken on
all prior units of output.
For example, in Table 11.1 the monopolist can sell 3 units at $142 or 4 units at $132. By increasing output
from 3 to 4 units, the monopolist will enjoy a revenue gain equal to the $132 received for the 4th unit.
However, there will also be a revenue loss equivalent to the loss per unit on the first 3 units of $10 ($142 – $132)
multiplied by the number of units (3). This means a revenue loss of $30 on the 3 units already sold.
The net gain in revenue is the revenue gain minus the loss ($132 – $30) or $102. Note that this is the
difference between the total revenue figures for 3 and 4 units ($528 – $426). This net change in revenue of
$102 is the marginal revenue of the fourth unit, since it is the change to total revenue by adding the fourth
unit. Similarly, the marginal revenue of the second unit of output in Table 11.1 is $142 rather than its $152
price–because a $10 price cut must be taken on the first unit to increase sales from 1 to 2 units.
Similarly, to sell 3 units the firm must lower price from $152 to $142. The resulting marginal revenue
will be just $122 (or a $142 addition to total revenue from the third unit minus $10 price cuts on both the
first 2 units of output). This explains why the marginal revenue data of column 4 of Table 11.1 fall short
of product price in column 2 for all levels of output except the first. You will notice that total revenue is
increasing at a diminishing rate–as shown in column 3 of Table 11.1. This is because MR is, by definition,
the increase in TR for each extra unit of output.
The relationships between the demand, marginal revenue and total revenue curves are illustrated in
Figure 11.1(a) and (b). In these diagrams, we have extended the demand and revenue data of columns 1 to
4 of Table 11.1 by continuing to assume that successive $10 price cuts will each mean one additional unit
of sales–that is, 11 units can be sold at $62, 12 at $52 and so on.
The marginal revenue curve lies below the demand curve, and there is also a special relationship between
total revenue and marginal revenue. Marginal revenue is, by definition, the change in total revenue.
Therefore, we observe that–as long as marginal revenue is positive–total revenue is increasing. When
marginal revenue is zero, total revenue reaches its maximum. And when marginal revenue is negative,
total revenue is diminishing. Further, note that because price is average revenue–and since it declines with
output–then marginal revenue must be less than average revenue. Remember that marginal must be less
than average revenue for the average to fall.
PRICE ELASTICITY
pt
m
• when demand is elastic at the initial price a decline in price will increase total revenue
• when demand is inelastic at the initial price a decline in price will decrease total revenue.
pl
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The total revenue test for price elasticity of demand is the basis for our third conclusion. In Chapter 6, that
the total revenue test told us that:
ch
a
In all imperfectly competitive markets in which such downward-sloping demand curves are relevant–that
is, purely monopolistic, oligopolistic and monopolistically competitive markets–firms have a price policy.
The output decisions of such firms necessarily affect product price because of their ability to influence
total supply. This is most evident in pure monopoly, where one firm controls total output.
Faced with a down-sloping demand curve (where each output is associated with some unique price), the
monopolist unavoidably determines price in deciding what volume of output to produce. The monopolist
simultaneously determines both price and output. In columns 1 and 2 of Table 11.1 we find that the monopolist
can sell an output of only 1 unit at a price of $162, an output of only 2 units at a price of $152 per unit, and so on.
Wea are not suggesting that the monopolist is ‘free’ of market forces in establishing price and output,
nor that the consumer is somehow completely at the monopolist’s mercy. In particular, the monopolist’s
down-sloping demand curve means that the monopolist cannot raise price without losing sales (or gain
sales without charging a lower price).
er
‘PRICE MAKER’
Sa
Beginning at the top of the demand curve in Figure 11.1, observe that for all price reductions from $172
down to $82, total revenue increases (and marginal revenue is therefore positive). This means that demand
is elastic in this price range. However, for price reductions below $82, total revenue decreases (marginal
revenue is negative)–which indicates that demand is inelastic in that price range.
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FIGURE 11.1 DEMAND, MARGINAL REVENUE AND TOTAL REVENUE FOR AN IMPERFECTLY
COMPETITIVE FIRM
$
200
Elastic
150
Unit elasticity
100
Inelastic
MR
50
0
2
4
6
D
8
10
12
14
16
18
16
18
Q
(a) Demand and marginal revenue curves
$
750
TR
500
250
0
Q
2
4
6
8
10
12
14
ch
a
pt
Because an imperfectly competitive firm must lower price to increase its sales, its marginal revenue curve
(MR) lies below its down-sloping demand curve (D). Total revenue (TR) increases at a decreasing rate, reaches
a maximum, and then declines. Note that, because MR is the change in TR, a unique relationship exists
between MR and TR. When we move down the elastic segment of the demand curve, TR is increasing and,
hence, MR is positive. When TR reaches its maximum, MR is zero. And when we move down the inelastic
segment of the demand curve, TR is declining, so MR is negative. A monopolist or other imperfectly
competitive seller will never operate in the inelastic segment of its demand curve: MC must intersect MR
in the latter’s positive range.
er
(b) Total revenue curve
Learning objective
Checkpoint
pl
e
11.2
m
• The monopolist’s ‘own’ demand curve is down-sloping, as it faces the demand curve for the
Sa
market as a whole. The monopolist is a price maker not a price taker, as it can choose its
price–output combination on the market demand curve.
• The presence of a down-sloping demand curve causes the marginal revenue curve of the
monopolist to lie below its demand curve–that is, MR ⬍ AR (⫽ P) at all relevant output levels.
• Marginal revenue for the monopolist is negative beyond the point of unit elasticity of demand.
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PRICE AND OUTPUT DETERMINATION
What specific price–quantity combination on the demand curve will the pure monopolist choose? This
depends on both demand and marginal revenue data, and on the costs of production.
COST DATA
The firm is a monopolist in the product market but–on the cost side–we assume that it hires resources
competitively and employs the same technology as the competitive firm. This assumption permits us to
use the cost data developed in Chapter 9 and applied in Chapter 10, thus allowing a comparison of the
price–output decisions of a pure monopoly with those of a perfect competitor. Columns 5 to 7 of Table
11.1 restate the relevant cost concepts of Table 9.3.
MR ⴝ MC RULE
A profit-seeking monopolist will use the same rationale as a profit-seeking firm in a competitive industry.
It will produce each successive unit of output as long as it adds more to total revenue than it does to total costs.
The firm will produce up to the output at which marginal revenue equals marginal cost (MR ⫽ MC).
A comparison of columns 4 and 7 in Table 11.1 indicates that the profit-maximising output is 5 units.
The fifth unit is the last unit of output whose marginal revenue exceeds its marginal cost. What price will
the monopolist charge? The downward-sloping demand curve of columns 1 and 2 in Table 11.1 indicates
that there is only one price at which 5 units can be sold: $122.
This analysis is presented graphically in Figure 11.2, where the demand, marginal revenue, average
total cost and marginal cost data of Table 11.1 have been drawn. Comparison of marginal revenue and
FIGURE 11.2 THE PROFIT-MAXIMISING POSITION OF A PURE MONOPOLIST
200
175
MC
100
er
ATC
Profit
pt
125
122 Pm
94 A
75
AR
ch
a
Unit costs ($)
150
D
50
pl
e
MR
25
Qm
2
3
4
5
6
Quantity
7
8
9
10
Q
m
1
Sa
0
The pure monopolist maximises profits by producing the MR ⫽ MC output. In this instance profit is APm per
unit, and total profits are measured by the shaded rectangle.
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marginal cost confirms that the profit-maximising output is 5 units or, more generally, Q m. The unique
price at which Q m can be sold is found by extending a perpendicular up from the profit-maximising point
on the output axis and then horizontally across to the vertical axis from the point at which it hits the
demand curve. The indicated price is Pm. By charging a price higher than Pm, the monopolist must move
up the demand curve–meaning that sales will fall short of the profit-maximising level Q m. Specifically,
the firm will be failing to produce units of output whose marginal revenue exceeds their marginal cost. If
the monopolist charges less, it would involve a volume of sales in excess of the profit-maximising output.
Columns 2 and 5 of Table 11.1 indicate that, at 5 units of output, the product price of $122 exceeds the
average total cost of $94. Economic profits are therefore $28 per unit; total economic profits are then $140
(⫽ 5 ⫻ $28). In Figure 11.2, per-unit profit is indicated by the distance APm. Total economic profits–the
shaded area–are found by multiplying the per-unit profit by the profit-maximising output Q m.
The same profit-maximising combination of output and price can also be determined by comparing the
total revenue and total costs that are incurred at each possible level of production. You should use columns
3 and 6 of Table 11.1 to verify all the conclusions we have reached through the use of marginal revenue–
marginal cost analysis. Similarly, an accurate graphing of total revenue and total cost against output will
also show the greatest differential (the maximum profit) at 5 units of output.
INDUSTRY CONCENTRATION
AND (ACCOUNTING) PROFITS
PRACTISING
ECONOMIST
The discussion of this chapter suggests that under ideal conditions firms with an element of
monopoly power should be able to maximise their economic profits. A problem in testing for
the presence of monopoly is that economic profits are not readily observable. However, we
can observe estimates on accounting profit margins. While it has been long recognised that
high accounting profits need not mean economic profits are being generated in any given
situation, an examination over a range of businesses or activities may still provide us with
some insight into the benefits accruing to firms from increased market power. Here we present
further data on concentration ratios and profit margins derived from data produced by the
Australian Bureau of Statistics for a range of industries.
Agriculture, Forestry and Fishing
8.2
66.8
34.7
pt
3.7
EBITDA-TOINCOME (%)**
16.0
40.3
62.8
6.4
70.3
13.6
Construction
24.6
10.4
Wholesale Trade
41.4
4.9
5.6
3.8
4.5
7.5
11.4
8.3
13.2
9.5
29.8
43.8
Accommodation and Food Services
20.8
Transport, Postal and Warehousing
45.8
Information, Media and Telecommunications
78.9
pl
Sa
Retail Trade
9.2
e
Manufacturing
Electricity, Gas, Water and Waste Services
m
Mining
OPERATING
PROFIT
BEFORE
TAX-TOINCOME (%)*
ch
a
INDUSTRY
LARGE
BUSINESSES
SHARE OF SALES
REVENUES (%)
er
SHARE OF INDUSTRY SALES BY LARGE FIRMS* AND INDUSTRY PROFIT MARGINS (%)
22.5
12.6
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LARGE
BUSINESSES
SHARE OF SALES
REVENUES (%)
OPERATING
PROFIT
BEFORE TAXTO-INCOME
(%)*
EBITDA-TOINCOME (%)**
Rental, Hiring and Real Estate Services
13.8
16.2
37.2
Professional, Scientific and Technical Services
26.7
20.4
10.6
Administrative and Support Services
33.4
7.2
11.7
Public Administration and Safety***
33.8
10.1
9.4
24.0
5.5
4.0
29.2
15.4
15.2
INDUSTRY
***
Education and Training
Health Care and Social Assistance
***
Arts and Recreation Services
36.5
14.1
12.4
Other Services
10.8
12.5
5.9
Total selected industries
42.9
10.6
13.3
* Large firms are those with 200 or more employees.
** EBITDA is earnings before interest, tax, depreciation and amortisation.
*** Measures refer only to the private sector.
Source: Authors’ estimates derived from Australian Bureau of Statistics, Counts of Australian Businesses, including Entries and Exits,
June 2007–June 2009, Cat No. 8165.0, and Australian Bureau of Statistics, Australian Industry, 2008-09, Cat No. 8155.0.
QUESTIONS
1. Graph the relationship between industry concentration and each of the measures of profit
margin, labelling each industry in your graphs.
2. Is a higher level of industry sales concentration associated with higher profit margins?
3. Are there obvious exceptions to the relationship that you observed in developing your
answer to question 2? What reasons might account for any exceptions?
4. Given the dictum that ‘higher risk requires higher return to compensate’, might some of
the relatively high profit margins observed in the associated table be a normal part of the
economic cost of keeping resources in high-risk industries? Are the industries in which
returns are highest obviously high risk? Discuss.
NO SUPPLY CURVE FOR MONOPOLY
Two important observations about the price–output behaviour of monopoly should be emphasised.
pt
ch
a
Sa
m
pl
e
where price declines cause total revenue to decrease (and marginal revenue to be negative). The profitmaximising monopolist will always avoid the inelastic segment of its demand curve in favour of some price–
quantity combination in the elastic segment. In other words, profit maximisation occurs where MR ⫽ MC.
Since MC is positive, MR must also be positive at any profit-maximising output. If MR is positive, then
we know that demand is elastic in this range of prices.
• We found in the analysis of a perfectly competitive firm that its marginal cost curve, above close-down,
was the firm’s supply curve. Each possible market price was associated with a specific output, so defining
the supply curve. The notion of a supply curve does not, however, apply in a purely monopolistic (or
any other imperfectly competitive) market. At any given demand and cost conditions, there will be only
one profit-maximising price–output combination. Further, there is no unique relationship that can be
established between price and quantity supplied. It is possible for the monopolist to supply different
quantities at the same price or the same quantity at different prices.
er
• A generalisation that emerges is that a monopolist will never choose a price–quantity combination
Figure 11.3 illustrates that the monopolist has no unique supply curve. The monopolist chooses to supply
different quantities at the same price or the same quantity at different prices. The monopolist does not
have a supply curve but chooses a price–output combination, given current demand conditions.
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FIGURE 11.3 THE MONOPOLIST HAS NO UNIQUE SUPPLY CURVE
$
$
MC
P
MC
P1
P2
AR 2
AR 2
MR 2
MR 1
Q1Q
AR 1
AR 1
2
MR 2
MR 1
Q
Q
Q
It is possible for the monopolist to supply different quantities at the same price or the same quantity at
different prices. The monopolist does not have a supply curve but chooses a price–output combination,
given current demand conditions.
MISCONCEPTIONS CONCERNING
MONOPOLY PRICING
Our analysis refutes some popular fallacies concerning the behaviour of monopolies.
NOT HIGHEST PRICE
A monopolist can manipulate output and price, thus it is often claimed that a monopolist ‘will charge the
highest price it can get’. This is a misguided assertion. There are many prices above Pm in Figure 11.2, but
the monopolist avoids them solely because they entail a smaller than maximum profit. Total profits are the
difference between total revenue and total costs, and each of these two determinants of profits depends on
the quantity sold as much as on the price and unit cost.
ch
a
pt
The monopolist seeks maximum total profits, not maximum unit profits. In Figure 11.2 a careful comparison
of the vertical distance between ATC and price at various possible outputs indicates that per-unit profits
are greater at a point slightly to the left of the profit-maximising output Q m. This is seen in Table 11.1,
where unit profits are $32 at 4 units of output, as compared with $28 at the profit-maximising output of
5 units. The monopolist is accepting a lower-than-maximum per-unit profit because the additional sales
more than compensate for the lower unit profits. A profit-seeking monopolist would obviously rather sell
5 units at a profit of $28 per unit (for a total profit of $140) than 4 units at a profit of $32 per unit (for a total
profit of only $128).
er
TOTAL, NOT UNIT, PROFITS
e
LOSSES
Sa
m
pl
Pure monopoly does not guarantee economic profits. It is true that the likelihood of economic profits
is greater for a pure monopolist than for a perfectly competitive producer. (In the long run the perfectly
competitive is likely to achieve merely a normal profit due to the free and easy entry of new firms.)
Barriers to entry permit the monopolist to perpetuate economic profits in the long run (but do not
guarantee it).1
Like the perfect competitor, the monopolist cannot persistently operate at a loss. It must realise a normal
profit or better in the long run, or it will not survive. However, if the demand and cost situation faced
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FIGURE 11.4 THE LOSS-MINIMISING POSITION OF A PURE MONOPOLIST
Price and unit cost
MC
ATC
A
Pm
AVC
Loss
MR
0
D
Qm
Output
If demand D is weak and costs are high, the pure monopolist may be unable to make a profit. It will minimise
its losses in the short run by producing at the output where MR ⫽ MC. Loss per unit is APm and total losses
are indicated by the shaded rectangle.
by the monopolist is less favourable than that shown in Figure 11.2, it may realise short-run losses. The
monopolist shown in Figure 11.4 is dominant in the market but realises a loss in the short run because of
a weak demand and relatively high costs. It may continue to operate for a while because variable costs are
covered and a contribution is being made towards fixed costs.
Learning objective
Checkpoint
11.3
pt
ch
a
Sa
m
pl
e
revenue and marginal cost–that is, by choosing to produce at the output level where MR ⫽ MC,
and then charging the appropriate price.
• Because marginal cost is positive, the monopolist will always prefer to choose a price–output
combination in the elastic range of the demand curve.
• As there is only one optimum price–output combination, the monopoly seller has a supply
point, but not a supply curve.
• Because the monopolist faces a down-sloping demand curve, P ⬎ MC at equilibrium for the
monopolist.
• Barriers to entry may permit a monopolist to choose price–output combinations that provide
economic profits even in the long run.
• Misconceptions about monopoly pricing can be dispelled as follows:
– The monopolist does not charge ‘the highest price it can get’. It charges a profit-maximising
price.
– The monopolist seeks maximum total profits, not maximum unit profits.
– Pure monopoly does not guarantee economic profits–high costs and a weak demand may
prevent the monopolist from realising any profit at all.
er
• Like the competitive seller, the pure monopolist will maximise profits by equating marginal
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GOVERNMENT-GRANTED
MONOPOLY AND RETURNS
PRACTISING
ECONOMIST
That government legislation is one of the primary sources of monopoly power has been
discussed in some detail in this chapter. However, it is rare to find relatively unambiguous
evidence on the impact of this source of monopoly power. Here we present data from
a study on the impacts of state versus private ownership and monopoly power on
profitability in the telecommunications industry. Our data relates to telephone companies
in the Americas, Asia, the Caribean, Eastern Europe and the Indian subcontinent. The time
in this example is 2000 to 2001. Our measure for profitability is return on sales (ROS)–
profit before interest and tax are deducted relative to sales revenues. Again this is an
imperfect indicator of the impact of monopoly power in any one situtation, but we can
hope that over a set of data it may provide some indication of the producer benefit of
monopoly.
FIRM, OWNERSHIP/CONTROL, MARKET SEGMENTS IN WHICH COMPETITION
IS PRESENT AND RETURN ON SALES (ROS)
COMPETITION PRESENT IN
FIRM (COUNTRY)
OWNERSHIP/
CONTROL*
MOBILE
TELEPHONE
SERVICES
LOCAL
TELEPONE
SERVICES
LONGDISTANCE
TELEPHONE
SERVICES
ROS (%)
Telecom Argentina
(Argentina)
private
yes
yes
yes
18.6
Telefonica de Argentina
(Argentina)
private
yes
yes
yes
20.5
Belize Telecom
(Belize)
private
no
no
no
48.7
state
yes
no
no
27.4
CTC (Chile)
private
yes
yes
yes
27.4
ENTEL-Chile (Chile)
private
yes
yes
yes
22.9
SPT (Czech Republic)
yes
yes
yes
18.9
state
yes
no
no
9.6
GUATEL (Guatemala)
state
yes
yes
yes
43.9
private
yes
no
no
24.1
MTNL (India)
state
yes
yes
no
VSNL (India)
state
no
n.a.
n.a.
PT Telekomunikasi
(Indonesia)
state
yes
no
no
Cable & Wireless
(Jamaica)
private
yes
no
no
Korea Telecom (Korea)
state
yes
yes
Telekom Malaysia
(Malaysia)
state
yes
yes
TELMEX (Mexico)
private
yes
Telefonica del Peru
private
yes
33.4
e
pl
m
21.2
28.5
yes
31.4
12.4
yes
31.7
yes
yes
37.7
yes
yes
32.0
Sa
pt
MATAV (Hungary)
er
private
EMETEL (Ecuador)
ch
a
BTC (Bulgaria)
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FIRM (COUNTRY)
TPSA (Poland)
OWNERSHIP/
CONTROL*
private
MOBILE
TELEPHONE
SERVICES
yes
LOCAL
TELEPONE
SERVICES
yes
LONGDISTANCE
TELEPHONE
SERVICES
ROS (%)
yes
11.0
ROMTEL (Romania)
private
yes
no
no
6.4
CANTV (Venezuela)
private
yes
yes
yes
15.3
* as of 2000/2001.
Source: Table 2 (p. 227) and Appendix (p. 240) in Viani, Bruno E 2004, ‘Private Control, Competition, and the Performance of Telephone Firms in
Less Developed Countries’, International Journal of the Economics of Business, Vol. 11, No. 2, July 2004, pp. 217–40.
QUESTIONS
1. Prepare two tables. In each you should calculate the average return and range of returns for
the telephone companies in the above table. The first table should contain data by presence
(or absence) of competition, the second information by form of ownership.
2. Are companies with greater monopoloy power in segments of the telecommunications
market more or less profitable on average than those that face greater competition? Do your
findings fit with your expectations?
3. Prepare another table. In this table you should calculate the average return for the telephone
companies in the above table split first by form of ownership then by the presence (or
absence) of competition in given market segments.
4. Of the four groups of companies that you identified in question 3, which is the most
profitable? Can you provide reasons for this result? What other factors beside monopoly
power will influence proitability in any market?
5. For the privately controlled companies in the above table does monopoly power offer large
benefits?
er
ECONOMIC EFFECTS
OF MONOPOLY
e
PRICE, OUTPUT AND EFFICIENCY
ch
a
• price, output and efficiency
• the distribution of income
• some difficulties involved in making cost comparisons between competitive and monopolistic firms
• technological advance.
pt
We now evaluate pure monopoly from the standpoint of society as a whole. Our emphasis will be on:
Sa
m
pl
In Chapter 10 we concluded that perfect competition would result in both ‘productive efficiency’ and
‘allocative efficiency’. Productive efficiency is realised because the free entry and exit of firms would
force firms to operate at the optimum rate of output where unit costs of production would be at a
minimum. Further, competitive equilibrium would also entail allocative efficiency; production would
occur up to the point at which price (the measure of a product’s marginal benefit to society) equals
marginal cost (the measure of the alternative products forgone by society in the production of any given
commodity).
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PRODUCTIVE AND ALLOCATIVE INEFFICIENCY
Figure 11.5 indicates that–given the same costs–a pure monopoly firm will produce far less desirable results.
The pure monopolist will maximise profits by producing an output of Q m and charging a price of Pm. At
Q m units of output, it is clear that product price is considerably greater than marginal cost. This means
that society values additional units of this monopolised product more highly than it does the alternative
products that resources could otherwise produce. In other words, the monopolist’s profit-maximising
output results in an underallocation of resources. The monopolist finds it profitable to restrict output
and therefore employ fewer resources than are justified from society’s standpoint. Further, the monopolist
will not tend to be pushed to produce the minimum average cost output, thus contradicting our concept of
productive efficiency. Finally, the monopolist will find it profitable to sell a smaller output and to charge a higher
price than would a competitive industry.
Does monopoly lead to smaller output?
In Figure 11.5, we start with the perfectly competitive industry of Figure 10.7(b). The competitive industry’s
supply curve SS is the horizontal sum of the marginal cost curves of all the firms in the industry. Comparing
this with industry demand DD, we obtain the purely competitive price and output of Pc and Q c. Now
suppose that this industry becomes a pure monopoly as a result of a wholesale merger (or one firm buying
out all its competitors). Assume that no changes in costs or market demand result from this dramatic
change in the industry’s structure. What was formerly, say, 100 competing firms is now a pure monopolist
consisting of 100 branch plants.
The industry supply curve is now simply the marginal cost curve of the monopolist, the summation
of the MC curves of its many branch plants. The important change, however, is on the market demand
side. From the viewpoint of each individual competitive firm, price was given, and marginal revenue was
therefore equal to price. Each firm equated MC to MR (and therefore to P) in maximising profits (see
Chapter 10). But industry demand and individual demand are the same to the pure monopolist–the firm is
the industry, and thus the monopolist correctly envisions a down-sloping demand curve DD. This means
that marginal revenue MR will be less than price; graphically, the MR curve lies below the demand curve.
In choosing the profit-maximising MC ⫽ MR position, the monopolist selects an output Q m which is
smaller and a price Pm which is greater than if the industry were organised competitively.
INCOME DISTRIBUTION
Business monopoly tends to contribute to inequality in the distribution of income. Because of their market
power, monopolists charge a higher price than would a perfectly competitive industry with the same
er
FIGURE 11.5 MONOPOLY AND INDUSTRY EQUILIBRIUM
D
pt
P
ch
a
S
Pm
pl
e
⌺MCs
Pc
D
Sa
MR
m
S
Q
0
Qm Qc
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costs. In effect monopolists are able to levy a ‘private tax’ on consumers and realise substantial economic
profits. It should be noted that these monopolistic profits are not widely distributed because company
share ownership is largely concentrated in the hands of upper income groups. The owners of monopolistic
enterprises therefore tend to accummulate wealth at the expense of the rest of society.
COST COMPLICATIONS
Our evaluation of pure monopoly has led us to conclude that–given identical costs–a purely monopolistic
firm will find it profitable to charge a higher price, produce a smaller output, and foster an allocation of
economic resources inferior to that of a perfectly competitive firm. These contrasting results are founded
on the barriers to entry that characterise monopoly.
Now we must recognise that costs may not be the same for purely competitive and monopolistic
producers. Unit costs incurred by a monopolist may be either larger or smaller than those facing a perfectly
competitive firm. Several potentially conflicting considerations are involved:
• economies of scale
• the notion of ‘X-inefficiency’
• the ‘very long run’ perspective that allows for technological advance.
We examine the first two issues here. (Technological advance is covered in the next section.)
ECONOMIES OF SCALE REVISITED
We have assumed that the unit costs available to the perfectly competitive and the purely monopolistic firm
are the same–but this may not be true in practice. Given production techniques and, therefore, production
costs, consumer demand may not be sufficient to support a large number of competing firms producing at
an output that permits each of them to realise all existing economies of scale. In such instances a firm must
be large in relation to the market–that is, it must be monopolistic–to produce efficiently (at low unit cost).
This is the natural monopoly case discussed earlier.
Most economists feel that the natural monopoly (or public utilities) case is not significant enough to
undermine our general conclusions concerning the restrictive nature of monopoly. Evidence suggests that
the giant companies that populate many manufacturing industries now have more monopoly power than
we can justify merely on the grounds of existing economies of scale.
X-INEFFICIENCY
ch
a
pt
er
X-inefficiency the
failure to produce any
given output at the
lowest average (and
total) cost possible.
Sa
m
pl
e
Economies of scale may argue in favour of monopoly in a few cases. But the notion of X-inefficiency
suggests that monopoly costs might be higher than those associated with more competitive industries.
What is X-inefficiency? Does it adversely effect monopolists more than competitive firms?
All the average cost curves used in this and other chapters are based on the assumption that the firm
chooses the most efficient of the existing technologies. In other words, the firm chooses the technology
that permits it to achieve the minimum average cost for each level of output (see Chapter 9). X-inefficiency
is the notion that a firm’s actual costs of producing any output are greater than the minimum possible costs.
Why does X-inefficiency occur when it obviously tends to reduce profits? The answer is that managers
may often have goals–such as firm growth, an easier work life, the avoidance of business risk, providing
jobs for incompetent friends and relatives–that conflict with cost minimisation. Or X-inefficiency may
arise because a firm’s workers are poorly motivated. Or a firm may simply become lethargic and relatively
inert. It may rely on past experience and reliable methods in decision making–as opposed to actively
making relevant calculations of costs and revenues.
For present purposes, the relevant question is whether monopolistic firms are more susceptible to
X-inefficiency than are competitive producers. Presumably the answer is ‘yes’. Firms in competitive
industries are continually under pressure from rivals, which theoretically forces them to be internally
efficient as a matter of survival. But monopolists and oligopolists are sheltered from competitive forces,
and such an environment is conducive to X-inefficiency. Empirical evidence on X-inefficiency is largely
anecdotal and sketchy–but it does suggest that the smaller the amount of competition, the greater is
X-inefficiency.
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TECHNOLOGICAL ADVANCE: DYNAMIC EFFICIENCY
Dynamic
efficiency the ability
to develop the most
efficient production
techniques over time.
We have noted that our criticisms of monopoly must be qualified in those instances where existing massproduction economies may be lost if an industry comprises a large number of small, competing firms.
Now we consider the issue of dynamic efficiency–which focuses on the question of whether monopolists
are more likely to develop more efficient production techniques over time than are competitive firms.
Are monopolists more likely to improve productive technology–thus lowering (shifting downwards)
their average cost curves–than are competitive producers? We will concentrate on changes in productive
techniques but the same question applies to product improvement. Do monopolists have greater means
and incentives to improve their products and thus improve consumer satisfaction? This is a discussion that
allows great scope for valid differences of opinion.
THE COMPETITIVE MODEL
Competitive firms certainly have the incentive–a market mandate–to use the most efficient known
productive techniques. Their very survival depends on their efficiency. But competition deprives firms of
economic profit–an important means and a major incentive for developing new products and improving
production techniques. The profits of technological advance will be short-lived to the innovating
competitor. An innovating firm in a competitive industry will find that its many rivals will soon duplicate
or imitate any technological advance it may achieve. Rivals will share the rewards but not the costs of
successful technological research.
ch
a
pt
In contrast, thanks to entry barriers, a monopolist may persistently realise substantial economic profits.
Thus, the pure monopolist will have greater financial resources for technological advance than will
competitive firms. But what about the monopolist’s incentives for technological advance? It is not easy to
anser this question.
There is one persuasive argument that suggests that the monopolist’s incentives to develop new
products and new techniques will be weak. The absence of competitors means that there is no automatic
stimulus to technological advance in a monopolised market. Due to its sheltered market position, the pure
monopolist can afford to be inefficient and lethargic. The keen rivalry of a competitive market penalises
the inefficient–but an inefficient monopolist does not face this penalty because it has no rivals.
The monopolist has every reason to become satisfied with the advantages and to become complacent.
It may benefit the monopolist to delay technological improvements in both product and production
techniques in order to exploit existing capital equipment fully. New and improved products and techniques,
may be suppressed by monopolists to avoid losses caused by sudden obsolescence of existing machinery
and equipment. And, when improved techniques are later introduced by monopolists, the accompanying
cost reductions will accrue to the monopolist as increases in profits–and only partially to consumers in the
form of lower prices and an increased output.
Proponents of this view state that in some industries which approximate the pure monopoly model, the
interest in research has been minimal. Instead, many advances have come largely from outside the industry
or from the smaller firms that make up the ‘competitive fringe’ of the industry–that is, the ‘competitive’
firms just outside the monopoly.
Basically, there are at least two counter-arguments:
er
THE MONOPOLY MODEL
• Technological advance lowers unit costs and so expands profits. As our analysis of Figure 11.2 implies,
Sa
m
pl
e
lower costs will lead to a profit-maximising position that involves a larger output and a lower price
than previously. Any expansion of profits will not be of a transitory nature; barriers to entry protect
the monopolist from profit encroachment by rivals. In brief, technological progress is profitable to the
monopolist.
• Research and technological advance may be one of the monopolist’s barriers to entry. Thus, the
monopolist must persist and succeed in the area of technological advance–or eventually they will be
successfully challenged by new competitors (including those overseas). Technological advance, it is
argued, is essential to the maintenance of monopoly.
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A MIXED PICTURE
How can we generalise on the economic efficiency of perfect monopoly?
• In a static economy, where economies of scale are equally accessible to perfectly competitive and to
monopolist firms, perfect competition will be superior to pure monopoly–because pure competition
compels the use of the best known technology and allocates resources to meet society’s wants.
• Where economies of scale are available to the monopolist and unavailable to small competitive
producers–and when changes in the rate of technological advance are important–this gives the
monopolist a great advatage. Subsequently, the inefficiencies of pure monopoly are mostly not apparent.
Variations between industries are likely to be significant.
Learning objective
Checkpoint
11.4
• Given the same costs, the pure monopolist will find it profitable to restrict output and charge
a higher price than will a competitive industry. This restriction of output causes allocative
inefficiency. This is evidenced by the fact that price exceeds marginal cost in monopolised
markets. Production inefficiency is also a likely feature of monopoly due to the lack of
incentive to produce at minimum average cost.
• Monopoly tends to increase income inequality, due to concentration of the payment of
economic profits to a few individuals.
• The costs of monopolists and a competitive industry may not be the same. The ability
to exploit economies of scale may reduce per-unit costs for the monopolist; however,
X-inefficiency–a failure to produce any output level at the lowest average or total cost–may
increase them.
• Economists disagree about the degree to which pure monopoly is conducive to technological
advance. Some feel that pure monopoly is more progressive than pure competition because
its ability to realise economic profits provides the financing of technological research. Others
argue that the absence of rival firms and the monopolist’s desire to exploit fully existing capital
facilities weaken the monopolist’s incentive to innovate.
pt
e
CONDITIONS
Price discrimination
when a given product
is sold at more than
one price and the
price differences are
not justified by cost
differences.
ch
a
So far we have assumed that the monopolist charges a uniform price to all buyers. Under certain conditions,
the monopolist might be able to exploit its market position more fully by charging different prices to
different buyers. In doing this, the seller is engaging in price discrimination. This occurs when a given
product is sold at more than one price and the price differences are not justified by cost differences.
er
PRICE DISCRIMINATION
pl
The opportunity to engage in price discrimination is not available to all sellers. Price discrimination is
workable when three conditions are realised:
that is, some ability to control output and price.
m
• Monopoly power: The seller must be a monopolist or, at least, possess some degree of monopoly power–
Sa
• Market segmentation: The seller must be able to segregate buyers into separate classes where each group
has a different willingness or ability to pay for the product. This separation of buyers is usually based on
different elasticities of demand (as later illustrations will make clear).
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• No resale: The original purchaser cannot resell the product or service. If those who buy in the low-price
segment of the market can easily resell in the high-price segment, the resulting increase in supply would
lower price in the high-price segment. The price discrimination policy would be undermined. This
correctly suggests that service industries–such as the transport industry or legal and medical services,
where resale is not possible–are especially susceptible to price discrimination.
ILLUSTRATIONS
Price discrimination is widely practised in our economy. The sales representative who must communicate
important information to company headquarters has a highly inelastic demand for long-distance telephone
service and pays the high daytime rate. The relative who has moved interstate and makes a periodic long
distance call to ‘home’ has an elastic demand and defers the call to take advantage of lower evening or
weekend rates.
Electricity and gas utilities could segment their markets by end uses, such as lighting and heating. The
absence of reasonable substitutes means that the demand for electricity for illumination is inelastic and the
price per kilowatt hour for this use is high. But the availability of natural gas and petroleum as alternatives
to electric heating makes the demand for electricity relatively elastic for this purpose, and the price charged
could be lower. Similarly, industrial users of electricity may be charged lower rates than residential users
because the former may have the alternative of constructing their own generating equipment whereas the
individual household does not.
Cinemas and golf courses vary their charges on the basis of time (higher rates in the evening and on
weekends when demand is strong) and age (ability to pay). Railways may vary the rate charged per tonne
of freight according to the market value of the product being shipped. The shipper of 10 000 kilograms of
television sets or costume jewellery will be charged more than the shipper of 10 000 kilograms of gravel
or coal. Doctors and lawyers may set their fees for a given service on the basis of ability to pay–so a rich
person may pay a higher fee for a divorce or an appendectomy than a poor person. A manufacturer might
sell the same brandy at a high price under a prestige label but at a lower price under a different label.
Airlines charge high fares to travelling executives, whose demand for travel tends to be less elastic–but
offer a variety of lower fares such as student rates and ‘standby fares’ to attract holiday makers and others
whose demands are more elastic.
CONSEQUENCES
There are two economic consequences of price discrimination:
pt
discriminating monopolist.
er
• A monopolist will be able to increase its profits by practising price discrimination.
• Other things being equal, a discriminating monopolist will produce a larger output than will a non-
ch
a
MORE PROFITS
Sa
m
pl
e
The simplest way to understand why price discrimination can yield additional profits is to look again at
our monopolist’s dowward-sloping demand curve in Figure 11.2. Although the profit-maximising uniform
price is $122, the segment of the demand curve lying above the profit area in Figure 11.2 tells us that there
are buyers of the product who would be willing to pay more than Pm ($122) rather than go without the
product (there is consumer surplus present for each of these consumers).
If the monopolist can identify and segregate each of these buyers and so charge the maximum price
each would pay–extracting this consumer surplus–the sale of any given level of output will be more
profitable. In columns 1 and 2 of Table 11.1 we note that the buyers of the first 4 units of output would be
willing to pay more than the equilibrium price of $122. If the seller could somehow practise perfect price
discrimination by extracting the maximum price each buyer would pay, total revenue would increase from
$610 (⫽ $122 ⫻ $5) to $710 (⫽ $122 ⫹ $132 ⫹ $142 ⫹ $152 ⫹ $162) and profits would increase from
$140 (⫽ $610 – $470) to $240 (⫽ $710 – $470).
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MORE PRODUCTION
Other things being equal, the discriminating monopolist will choose to produce a larger output than will
the non-discriminating monopolist. Recall that when the non-discriminating monopolist lowers price to
sell additional output, the lower price will apply not only to the additional sales, but also to all prior units
of output. As a result, marginal revenue is less than price and, graphically, the marginal revenue curve lies
below the demand curve. The fact that marginal revenue is less than price is a disincentive to increase
production.
But when a perfectly discriminating monopolist lowers price, the reduced price applies only to the
additional unit sold and not to prior units. Thus, price and marginal revenue are equal for any unit of output.
Graphically, the perfectly discriminating monopolist’s marginal revenue curve will coincide with its demand
curve, and the disincentive to increase production will be removed. Refer to Table 11.1, and imagine that
marginal revenue now equals price. Now the monopolist will find that it is profitable to produce 7, rather
than 5, units of output. The additional revenue from the sixth and seventh units is $214 (⫽ $112 ⫹ $102).
Thus total revenue for 7 units is $924 (⫽ $710 ⫹ $214). Total cost for 7 units is $640, so profits are $284.
Learning objective
Checkpoint
11.4
• Price discrimination occurs when a given product is sold at more than one price to different
sections of the community and these price differences cannot be justified through the presence
of cost differences.
• Price discrimination requires three conditions to be met–monopoly power, market
segmentation and no resale of the product. The monopolist can segregate buyers on the basis
of their different elasticities of demand, charging higher prices to those with more inelastic
demand–provided that the product cannot be readily transferred between the segmented
markets.
• Price discrimination allows the monopoly to extract greater profit from consumers, and will
usually lead to higher levels of output.
• Under perfect discriminating monopoly, the output of the monopoly will be the same as that of
the purely competitive firm, because the demand and marginal revenue curves will coincide.
pt
ch
a
Sa
SOCIALLY OPTIMUM PRICE: P ⫽ MC
m
pl
e
Historically, many purely monopolistic industries in Australia have been either directly operated by federal
or state boards or commissions–railways, telephone, gas, electricity and water supplies–or have a degree of
regulation exercised by government over their monopolies (as is the case with private monopolies).
Figure 11.6 shows the demand and cost conditions of a natural monopoly. Because of heavy fixed costs,
demand cuts the average cost curve at the point where average cost is still falling. It would be inefficient
to have many firms in such an industry because–by dividing the market–each firm would move further to
the left on its average cost curve so that unit costs would be substantially higher. The relationship between
market demand and costs is such that the attainment of low unit costs presumes only one producer.
We know that Pm and Q m are the profit-maximising price and output the unregulated monopolist would
choose, following the MR ⫽ MC rule. Because price exceeds average total cost at Q m, the monopolist enjoys
a substantial economic profit. Further, price exceeds marginal cost, which indicates an underallocation of
resources to this product or service. Can government production or regulation bring about better results
from society’s point of view?
er
THE ECONOMIC REGULATION OF MONOPOLY
If the objective of our regulatory commission is to achieve an efficient allocation of resources, it could
attempt to establish a legal (ceiling) price for the monopolist that is equal to marginal cost. Remembering
The material is for promotional purposes only. No authorised printing or duplication is permitted. (c) McGraw-Hill Australia
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FIGURE 11.6 REGULATED MONOPOLY
Price and unit costs ($)
Pm
F
Pf
ATC
MR
0
MC
R
Pr
Qm
D
Qf
Qr
Quantity
pt
ch
a
‘FAIR-RETURN’ PRICE: P ⴝ AC
But the socially optimum price Pr is likely to pose a problem of losses for the regulated firm. The price
that equals marginal cost may be so low that average total costs are not covered (see Figure 11.6). The
inevitable result is losses. The reason for this lies in the basic character of public utilities. Because they are
required to meet ‘peak’ demands (both daily and seasonally) for their product or service, they tend to have
substantial excess production capacity when demand is relatively ‘normal’. This high level of investment
in capital facilities means that unit costs of production are likely to decline over a wide range of output.
In technical terms, the market demand curve in Figure 11.6 cuts marginal cost at a point to the left of the
intersection of marginal cost and average total cost. Thus, the socially optimum price is necessarily below
ATC. Therefore, to enforce a socially optimum price on the regulated monopolist would mean short-run
losses, and, in the long run, bankruptcy for the utility.
Sa
m
pl
e
socially optimum
price the price that
achieves allocative
efficiency (P ⫽ MC).
that each point on the market demand curve designates a price–quantity combination, and noting that
marginal cost cuts the demand curve only at point R, we find that Pr is the only price that is equal to
marginal cost.
The imposition of this maximum or ceiling price causes the monopolist’s effective demand curve to
become PrRD. Demand curve is perfectly elastic on the first section of the demand curve, and Pr ⫽ MR up
to the point R, where the regulated price ceases to be effective. The important point is that–given the legal
price Pr–the monopolist will now maximise profits by producing Q r units of output, because it is at this
output that MR (⫽ Pr) ⫽ MC. By making it illegal to charge more than Pr per unit, the regulatory agency
has eliminated the monopolist’s incentive to restrict output in order to benefit from a higher price.
In brief, by imposing the legal price Pr and letting the monopolist choose its profit-maximising output,
the allocative results of pure competition can be simulated. Production takes place where Pr ⫽ MC, and
this equality indicates an efficient allocation of resources to this product or service.2 The price that achieves
allocative efficiency is called the socially optimum price.
er
Price regulation can improve the social consequences of a natural monopoly. The socially optimum price
Pr will result in an efficient allocation of resources, but is likely to entail losses and therefore call for
permanent public subsidies. The ‘fair-return’ price Pf will allow the monopolist to break even, but will
not fully correct the underallocation of resources.
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What to do? One option would be a public subsidy sufficient to cover the loss the socially optimal price
could create. Another possibility would be to condone price discrimination in the hope that the additional
revenue gained would permit the firm to cover costs. A third option would be to establish what is known
as a ‘fair-return’ price. Remembering that total costs include a normal, or ‘fair’, profit, we see that the
‘fair’ or ‘fair-return’ price in Figure 11.4 would be Pf, where price equals average cost. Because the demand
curve cuts average cost only at point F, it is clear that Pf is the only price that permits a fair return. The
corresponding output at regulated price Pf will be Q f and normal profit will be realised.
‘fair-return’ price the
price that equals average
cost (P ⫽ AC).
DILEMMA OF REGULATION
A comparison of results of the socially optimal price (P ⫽ MC) and the fair-return price (P ⫽ AC) suggests
a policy dilemma sometimes known as the dilemma of regulation. When price is set to achieve the most
efficient allocation of resources (P ⫽ MC), the regulated utility is likely to suffer losses. Survival of the
firm would presumably depend on permanent public subsidies out of tax revenues. On the other hand,
although a fair-return price (P ⫽ AC) allows the monopolist to cover costs, it only partially resolves the
underallocation of resources the unregulated monopoly would foster–that is, the fair-return price would
increase output only from Q m to Q f, whereas the socially optimum output is Qr. Despite this problem,
the basic point is that regulation can improve on the results of monopoly from the social point of view.
Price regulation can simultaneously reduce price, increase output and reduce the economic profits of
monopolies.
dilemma of
regulation the choice
of whether to use
taxation revenue to
subsidise the monopoly’s
fixed costs under
marginal cost pricing
(P ⫽ MC), or to accept
a lower than socially
optimal output under
‘fair-return’ pricing
(P ⫽ AC).
Learning objective
Checkpoint
11.5
• Price regulation can be used to eliminate, wholly or partially, the tendency of monopolists to
Sa
m
pl
e
ch
a
pt
er
underallocate resources and to earn economic profits. Price regulation usually comes in two
forms: socially optimum pricing and ‘fair-return’ pricing.
• Under socially optimum pricing, the government sets a ceiling price equal to marginal cost. The
profit-maximising choice for the monopoly is then to set output at the point where P ⫽ MC.
• Under ‘fair-return’ pricing, the government sets a price equal to average cost, allowing the
monopolist to achieve normal profit on investment.
• The dilemma implied by regulation of monopoly involves the choice of whether to subsidise
the monopoly’s fixed costs from taxation revenue under marginal cost pricing, or to accept a
lower than socially optimal output under ‘fair-return’ pricing.
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6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
pt
5.
m
17.
Sa
16.
pl
e
Summary
4.
ch
a
3.
monopoly, the ownership or control of essential raw materials, patent ownership and research and
licences.
Economies of scale imply that production requires substantial investment and operation at high levels
of output to achieve low-cost production. Natural monopolies provide extreme examples of this type
of entry barrier.
The ownership or control of essential raw materials may preclude competitors from acquiring the
necessary inputs or processes required to provide substitute products and therefore to compete against
the monopolist in the market.
Patent ownership and research and licences are legal barriers to entry and provide the owner with
exclusive rights to use an idea, process or technology over a specified time. The argument for this form
of protection against competition is that it allows the firm to recoup its investment in the research and
development required for bringing the product to market.
Barriers to entry help to explain the existence not only of pure monopoly but also of other imperfectly
competitive market structures. Barriers to entry that are very formidable in the short run may prove to
be surmountable in the long run due to technological and regulatory changes over time.
Like the competitive seller, the pure monopolist will maximise profits by following the marginal rule–
that is, by equating marginal revenue and marginal cost (MR ⫽ MC) and choosing to produce at that
output level, which then determines price.
Because marginal cost is positive, the monopolist will always prefer to choose a price–output
combination in the elastic range of the demand curve.
As there is only one optimum price–output combination, the monopoly seller faces a supply point, but
not a supply curve in the sense seen under pure competition.
Because the monopolist faces a down-sloping demand curve, P ⬎ MC at equilibrium.
Barriers to entry may permit a monopolist to choose price–output combinations that provide
economic profits even in the long run.
The following misconceptions exist about monopoly pricing:
(a) The monopolist charges the highest price possible. Rather, the monopolist charges a profitmaximising price.
(b) The monopolist maximises profit per unit. The maximum total profit is sought by the monopolist
and this rarely coincides with maximum unit profits.
(c) The monopolist always generates economic profit. High costs and a weak demand may prevent the
monopolist from realising any profit at all.
The costs of monopolists and a competitive industry may not be the same. The ability to exploit
economies of scale may reduce per-unit costs for the monopolist; however, X-inefficiency–a failure to
produce any output level at the lowest average or total cost–may increase them.
Economists disagree about the extent to which pure monopoly is conducive to technological advance.
Some feel that pure monopoly is more progressive than pure competition because its ability to realise
economic profits finances technological research. Others argue that the absence of rival firms and the
monopolist’s desire to fully exploit existing capital facilities weaken the incentive to innovate.
Given the same costs, the pure monopolist will find it profitable to restrict output and charge a higher
price than would a competitive industry. This restriction of output causes allocative inefficiency, as
evidenced by the fact that price exceeds marginal cost in monopolised markets. Productive inefficiency
is also a likely feature of monopoly, due to the lack of incentive to produce at minimum average cost.
This is especially likely in the presence of economies of scale.
Monopoly tends to increase income inequality, due to concentration of the payment of economic
profits to a few individuals.
Price discrimination requires three conditions to be met: monopoly power, market segmentation,
and no resale of the product. The monopolist can segregate buyers on the basis of their different
elasticities of demand, charging higher prices to those with more inelastic demand, provided that the
product cannot be readily transferred between the segmented markets.
er
1. A pure monopolist is the sole producer of a product for which there are no close substitutes available.
2. Barriers to entry exist in a number of forms and include economies of scale, the presence of natural
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18. Price discrimination allows the pure monopoly to extract greater profit from consumers than under
standard monopoly. This will usually lead to higher output levels, due to the change in the relationship
between the demand and marginal revenue curves under price discrimination. Under perfectly
discriminating monopoly, the output of the monopoly will be the same as that of the perfectly
competitive firm because the demand and marginal revenue curves coincide.
19. Price regulation can be used to eliminate, wholly or partially, the tendency of monopolists to
underallocate resources and to earn economic profits. Price regulation comes in two main forms,
socially optimum pricing and ‘fair-return’ pricing.
20. Under socially optimum pricing, the goverment sets a ceiling price equal to marginal cost. The profitmaximising choice for the monopoly then becomes to set output at the point where P ⫽ MC. Under
‘fair-return’ pricing, the government sets price equal to average cost, allowing the monopolist to
achieve normal profit on investment.
21. The dilemma implied by regulation of monopoly involves a choice between a number of alternatives.
The first is whether to subsidise a monopoly’s fixed costs from taxation revenue and to regulate for
marginal cost pricing to provide a socially optimal output level. The second is to accept an output
at a level lower than the level which is socially optimal and to use ‘fair-return’ pricing regulation. A
third alternative is to allow price discrimination between segments of the community to encourage an
increase in the monopoly’s output towards the socially optimum level.
KEY TERMS AND CONCEPTS
313
294
309
293
2. (a)
(b)
3. (a)
(b)
4. (a)
6.
7.
8.
9.
10.
11.
er
5.
pt
(b)
Explain how each barrier can foster monopoly or
oligopoly.
Which barriers give rise to the presence of monopoly
power that may be socially justifiable? Explain your
reasoning. [11.1]
How do the demand and marginal revenue curves
faced by a purely monopolistic seller differ from
those confronting a purely competitive firm?
Why do they differ? What is the significance of the
difference? [11.2]
How does a monopolist determine its optimal output
level?
Explain why a monopolistic seller will not find itself in
the inelastic range of its demand curve. [11.2, 11.3]
Carefully contrast the social efficiency of output under
perfect competition and pure monopoly. Tabulate your
findings.
(b) What do the differences between the two market
structures imply for the achievement of efficiency?
(Consider the two main definitions of efficiency.) [11.4]
(a) What is X-inefficiency?
(b) What are the reasons it exists? [11.4]
‘A monopoly may not be subject to pressures to develop
new products or to innovate.’ Is this true? Explain. [11.4]
Explain how a monopolist can use price discrimination to
increase its profits. [11.2]
(a) How do output and efficiency differ under pure
monopoly and perfectly discriminating monopoly?
(b) What is the key reason for this difference? [11.2, 11.4]
What fallacies exist about the character and implications
of monopoly pricing? [11.4]
(a) Briefly describe the two main forms of price regulation
for controlling monopoly.
(b) In what areas do they differ in their outcomes? [11.4]
What is the ‘dilemma of regulation’? [11.5]
ch
a
1. (a) Discuss the major barriers to entry in an industry.
312
307
e
CONCEPTUAL QUESTIONS
socially optimum price
X-inefficiency
pl
fair-return price
natural monopoly
price discrimination
pure monopoly
m
294
313
308
294
Sa
barriers to entry
dilemma of regulation
dynamic efficiency
economies of scale
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1
2
5.50
3
5.00
4
4.50
5
4.00
6
3.50
7
3.00
8
2.50
9
3. Suppose a pure monopolist (Firm M) is faced with the
demand schedule shown below and the same cost data as
the competitive producers discussed in Analytical question
3 in Chapter 10. [11.2, 11.3]
4. Let’s say that Firm M in question 4 could engage in perfect
price discrimination–that is, if it could charge each buyer
the maximum acceptable price. [11.2, 11.3]
(a) What would be the level of profits?
(b) What would the level of output be?
5. Critically evaluate and explain: [11.3]
(a) ‘Because they can control product price, monopolies
are always assured of profitable production simply by
charging the highest price consumers will pay.’
(b) ‘The pure monopolist seeks the output that will yield
the greatest per-unit profit.’
(c) ‘An excess of price over marginal cost is the market’s
way of signalling the need for more production of a
product.’
(d) ‘The more profitable a firm, the greater its monopoly
power.’
(e) ‘The monopolist has a price policy; the competitive
producer hasn’t.’
(f) ‘With respect to resource allocation, the interests of the
seller and of society coincide in a purely competitive
market but conflict in a monopolised market.’
(g) ‘In a sense, the monopolist makes a profit for not
producing. The monopolist produces profits more than
it does goods.’
6. Explain both verbally and graphically how price
regulation may improve the performance of monopolies.
Distinguish between ‘fair return’ and ‘socially optimum’
prices. [11.5]
7. Assume a monopolistic publisher agrees to pay an author 15
percent of the total revenue from text sales. Will the author
and the publisher want to charge the same price for the
text? Explain. [11.2]
er
6.50
6.00
1
2
3
4
5
6
7
8
9
10
pt
0
100
83
71
63
55
48
42
37
33
29
MARGINAL
REVENUE ($)
ch
a
$7.00
QUANTITY
DEMANDED (Q)
QUANTITY
DEMANDED
e
PRICE (P)
PRICE ($)
pl
competitive firm and industry have the same unit
costs. Contrast the two with respect to:
(i) price
(ii) output
(iii) profits
(iv) allocation of resources
(v) impact on the distribution of income.
(b) Both monopolists and competitive firms follow the MC
⫽ MR rule in maximising profits, so how do you account
for the different results? Why factors cause their costs
to be different? [11.3, 11.4]
2. Use the demand schedule that follows to calculate total
revenue and marginal revenue at each quantity. [11.2]
(a) Plot the demand, total-revenue, and marginal-revenue
curves and explain the relationships between them.
(b) Explain why the marginal revenue of the fourth unit
of output is $3.50, even though its price is $5.00. Use
Chapter 6’s total revenue test for price elasticity to
designate the elastic and inelastic segments of your
graphed demand curve. What generalization can you
make regarding the relationship between marginal
revenue and elasticity of demand?
(c) Suppose the marginal cost of successive units of output
were zero. What output would the profit-seeking firm
produce?
(d) use your analysis to explain why a monopolist would
never produce in the inelastic region of demand.
m
1. (a) Assume that a pure monopolist and a perfectly
(a) Calculate marginal revenue and determine the profitmaximising price and output for this monopolist.
(b) What is the level of profit? Verify your answer
graphically.
Sa
ANALYTICAL QUESTIONS
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ENDNOTES
Sydney Morning Herald, 20 March.
2. AAP 2011, ‘Supermarket chain Coles promises not to
3.
4.
5.
6.
7.
8.
9.
10.
import bananas after Cyclone Yasi’, The Sunday Telegraph,
5 February, www.dailytelegraph.com.au/money/
supermarket-chain-coles-promises-not-to-import-bananasafter-cyclone-yasi/story-e6frezc0-1226000623280.
Ainsworth, Michelle 2011, ‘Prices to go bananas’, Leader–
Maroondah Mail, Melbourne, Australia, 8 February.
Australian Bureau of Statistics, Australian Industry,
2008-09, Cat No. 8155.0.
Australian Bureau of Statistics, Counts of Australian
Businesses, including Entries and Exits, June 2007–June
2009, Cat No. 8165.0.
Campion, Vicki, Stolz, Greg & Murray, David 2011, ‘Returning
to pick up pieces–Fruit and veg set to go through the
roof as yachtie’s relieved mates really go bananas’, Daily
Telegraph, Sydney, Australia, 5 February.
Hartsukyer, Luke 2011, ‘Cyclone Yasi’s devastation of
banana crop is no excuse for allowing Filipino imports’,
4 February, www.lukehartsuyker.com.au/mediacentre/
mediareleases/2011/418-cyclone-yasis-devastation-ofbanana-crop-is-no-excuse-for-allowing-filipino-imports
.html.
Ife,Holly & Hudson, Phillip 2011, ‘Bananas rationed, prices
climbing’, Herald Sun, Melbourne, Australia, 5 February.
Statham, Larine 2011, ‘Science may save nation’s bananas’,
The Advertiser, Adelaide, Australia, 9 February.
Viani, Bruno E 2004, ‘Private Control, Competition, and
the Performance of Telephone Firms in Less Developed
Countries’, International Journal of the Economics of
Business, Vol. 11, No. 2, July 2004, pp. 217–40.
er
(a) Conduct an Internet search to find recent information
on this argument. On what bases has Microsoft been
attacked?
(b) Based on your study of monopoly and its sources,
on what theoretical principles do you think critics of
Microsoft based their cases? Are these arguments valid?
4. US pharmaceutical companies charge different prices for
prescription drugs to buyers in different nations, depending
on elasticity of demand and government-imposed price
ceilings. Explain why these companies, for profit reasons,
oppose laws allowing reimportation of drugs to the United
States. [11.2, 11.5]
5. It has been proposed that natural monopolists should be
allowed to determine their profit-maximizing outputs and
prices and then government should tax their profits away
and distribute them to consumers in proportion to their
purchases from the monopoly. Is this proposal as socially
desirable as requiring monopolists to equate price with
marginal cost or average total cost? [11.4, 11.6]
1. AAP 2006, ‘Cyclone devastates Australia’s banana crop’,
pt
[11.3, 11.4]
REFERENCES
ch
a
compete for the dollars of consumers. Pure monopoly,
therefore, does not exist.’ [11.1]
(a) Do you agree? Detail your reasoning and the limits to
your arguments (e.g. use Chapter 6’s concept of crossprice elasticity of demand in thinking about whether
monopoly exists).
(b) Does this make the study of monopoly redundant?
2. Price discrimination is frequently viewed as exploitation
of the consumer. [11.2]
(a) When is price discrimination considered socially
desirable?
(b) Provide five or more examples of price discrimination
with which you are familiar? Discuss whether each
is desirable or undesirable socially. (To find some
examples, you may wish to examine the following
sectors: public transport, telecommunications,
electricity supply, retail services and education.)
3. Microsoft has often been accused of engaging in monopoly
practices, yet it is only one of a number of Internet service
providers and companies producing operating systems.
e
1. ‘No firm is completely sheltered from rivals. All firms
competition. With perfect competition, the entry or exit
of firms guarantees that economic profits will be zero in
the long run. But, with monopoly, barriers to entry prevent
the competing away of profits by new firms.
2. Allocative efficiency is achieved, but productive efficiency
would be achieved only by chance. In Figure 11.6, production
at Q r is less than that associated with minimum average
cost. For the larger (minimum cost) output to occur would
require the demand curve DD to intersect MC exactly at the
minimum point of ATC.
pl
DISCUSSION QUESTIONS
Sa
is less important under monopoly than under perfect
m
1. The distinction between the short run and the long run
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ECONOMICS IN REALITY
Cyclone Yasi drives up banana prices
ch
a
pt
er
In the wake of Cyclone Yasi, reverberations were felt as far away as Neutral Bay as shoppers at Woolworths found the price
of bananas almost doubled in the same time it took the cyclone to cross land, rising from $3 per kg on Wednesday night
just before the cyclone crossed the Qld border to $5.98 per kg on the following Friday morning. IGA specialist, Gary Groves,
expects the price of bananas to increase further in coming weeks up to as high as $15 a kilo . . .
The category five cyclone dealt the banana industry a huge blow, flattening 75% of the nation’s banana crops in far north
Queensland. In Tully and Innisfail, two major banana growing areas, 95% of crops were damaged according to the Australia
Banana Growers Council. 80% of crops were damaged in the Kennedy area.
Cyclone Yasi also added further to the pain of Queensland banana growers, many of whom have only relatively recently
recovered from Cyclone Larry in 2006, which destroyed fruit crops and left 4 400 out of work. There will almost certainly be
some growers who do not have the resources to ride the storm out this time.
However if there is any light from the shock of Cyclone Yasi it is that many growers received better advance warnings of
the cyclone’s arrival and were at least able to harvest green crops before the cyclone arrived. Some growers cut down their
banana crops before the cyclone arrived, as crops regrow much faster from being cut down, than being knocked over by the
cyclone.
James Dale, Director of Queensland University’s Technology Centre for Tropical Crops and Biocommodities, warned of the
importance of having alternative multiple banana supplies in the aftermath of the disaster. Scientists are currently working on
genetically modified banana plants which may also assist in ridding [the soil] of the soil-borne fungus that destroyed Northern
Territory plantations.
Following Cyclone Larry, some supermarkets imported frozen bananas from Asia however this proved a controversial
decision as local growers were trying to re-establish their crops and the impost of additional import competition at that time
was not welcomed by local growers because of its depressing effect on prices. Federal member for Cowper, Luke Hartsuyker,
reacting to reports that Filipino banana growers were moving to access Australian markets in the wake of the disaster, said
‘Although there will be a short-term shortage of Australian bananas, we should be doing everything we can to get these
farmers back in production. The risks associated with Filipino bananas are as relevant today as they were before Cyclone Yasi.
It is essential that Australia remains free of exotic diseases such as Moko, Black Sigatoka and Freckle which are prevalent in
Philippine bananas. Unless the Government stands behind the Australian banana industry, many growers may walk off their
farms and not replant’.
Supermarket giant Coles, [which was] selling bananas for $4.48 a kilo, recently announced it will not seek to import bananas
to cover the expected shortage this time around and the Federal Government has also indicated it will not relax Australia’s
strict quarantine laws, which would be of benefit to foreign growers. However, in the short term for consumers, price rises are
immediate and expected to rise as much as $15 a kilo in the coming weeks.
. . . Ritchies Supa IGA supermarkets had bananas on special for $1.99 kilo but customers were limited to buying 3 kilos.
Consumers should be looking at local markets, which were among the cheapest places to buy bananas and other tropical fruit.
Authorities have vowed to hold those retailers accountable who are [predatory, taking advantage of] the recent floods and
cyclone Yasi in Northern Queensland.
Sa
m
pl
e
Sources: AAP 2011, ‘Supermarket chain Coles promises not to import bananas after Cyclone Yasi’, The Sunday Telegraph, 5 February, www.dailytelegraph.com.au/
money/supermarket-chain-coles-promises-not-to-import-bananas-after-cyclone-yasi/story-e6frezc0-1226000623280; AAP 2006, ‘Cyclone devastates Australia’s banana
crop’, Sydney Morning Herald, 20 March; Hartsukyer, Luke 2011, ‘Cyclone Yasi’s devastation of banana crop is no excuse for allowing Filipino imports’, 4 February, www.
lukehartsuyker.com.au/mediacentre/mediareleases/2011/418-cyclone-yasis-devastation-of-banana-crop-is-no-excuse-for-allowing-filipino-imports.html; Ife,Holly &
Hudson, Phillip 2011, ‘Bananas rationed, prices climbing’, Herald Sun, Melbourne, Australia, 5 February; Campion, Vicki, Stolz, Greg & Murray, David 2011, ‘Returning to pick
up pieces–Fruit and veg set to go through the roof as yachtie’s relieved mates really go bananas’, Daily Telegraph, Sydney, Australia, 5 February; Statham, Larine 2011,
‘Science may save nation’s bananas’, The Advertiser, Adelaide, Australia, 9 February; Ainsworth, Michelle 2011, ‘Prices to go bananas’, Leader–Maroondah Mail, Melbourne,
Australia, 8 February.
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Questions
Sa
m
pl
e
ch
a
pt
er
1. What market structure most appropriately describes the banana growing industry?
2. Explain and illustrate what the likely short run effect of the cyclone is on the cost curves of a banana
growing firm in the cyclone affected region?
3. Explain and illustrate using the perfect competition model what the likely short run effect of the cyclone is
on the profits and quantities produced by banana growing firm in the cyclone affected region
4. What is the long term response in the Industry to the existence of economic losses, economic profits or
normal profit? How will the changes from Q.2 and Q.3 affect the firm’s profit position in both the short run
and long run?
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