Managerial Economics

Topic: Market Structure of Monopoly

Reasons for Monopoly Forming
1. Exclusive Control over Essential Resources
•Example: De Beers and Diamonds
• De Beers historically controlled the majority of the world's diamond mines, which allowed the
company to dominate the diamond market.
2. Government Regulation and Licensing
•Example: Pharmaceutical Patents
• Pharmaceutical companies often obtain patents for new drugs, granting them exclusive rights
to manufacture and sell the drug for a certain period (usually 20 years).
•Example: Utility Companies
• Many local governments grant exclusive licenses to utility companies (electricity, water, gas) to
operate in specific regions.
3. Economies of Scale
•Example: Microsoft and Software
• Microsoft benefits from economies of scale in the software industry. The cost of producing an
additional unit of software (like Windows or Office) is minimal once the initial development is
complete, making it difficult for smaller companies to compete on price. This has helped
Microsoft maintain a dominant market position.
•Example: Indian Railways
4. Technological Superiority
•Example: Google and Search Engines
• Google has developed advanced search algorithms that provide more accurate and relevant search
results than competitors. This technological superiority has allowed Google to dominate the search
engine market, with a global market share exceeding 90%.
•Example: Intel and Microprocessors
• Intel's continuous innovation in microprocessor technology, coupled with its significant R&D
investments, has kept it at the forefront of the semiconductor industry, leading to a quasi-monopoly in
certain segments of the market.
5. Network Effects
•Example: Facebook and Social Media
•Example: Microsoft Windows
• Microsoft Windows became the standard operating system for personal computers.
6. Strategic Business Practices
•Example: Amazon and E-commerce
• Amazon has engaged in practices like predatory pricing, where it temporarily lowers prices to drive out
competitors. Once competitors are weakened or eliminated, Amazon can increase prices, thereby
consolidating its dominant position in e-commerce.
7. Capital Requirements and High Entry Barriers
•Example: Boeing and Airbus in Aircraft Manufacturing
•Example: Nuclear Power Plants

8. Brand Loyalty and Reputation

•Example: Coca-Cola
•Example: Apple
Private players that hold or have held monopolistic or near-monopolistic positions in various sectors in India:
1. Reliance Industries Limited (RIL)
•Sector: Petrochemicals and Refining
•Monopoly Type: Dominant Player
•Details: Reliance Industries, particularly in its petrochemicals and refining businesses, holds a dominant
position in the Indian market. With the largest refinery in the world in Jamnagar, Gujarat, RIL controls a
significant share of India's petrochemical market, making it a near-monopoly in several product categories.

2. IndiGo Airlines
•Sector: Aviation
•Monopoly Type: Market Leader (Near-Monopoly in Market Share)

3. Tata Consultancy Services (TCS)

•Sector: IT Services
•Monopoly Type: Dominant Player
•Details: TCS is one of the largest IT services companies globally and dominates the Indian IT services sector.

4. Nestlé India
•Sector: Packaged Food (Specifically Instant Noodles)
•Monopoly Type: Dominant Player (Near-Monopoly)
•Details: Nestlé India, with its Maggi brand, holds a near-monopoly in the instant noodles market in India.
5. Maruti Suzuki
•Sector: Automobile Manufacturing (Passenger Vehicles)
•Monopoly Type: Dominant Player

6. Hindustan Unilever Limited (HUL)

•Sector: Fast-Moving Consumer Goods (FMCG)
•Monopoly Type: Dominant Player
•Details: HUL is a dominant player in India's FMCG sector, particularly in categories like soaps, shampoos, and
detergents. With brands like Lifebuoy, Dove, Surf Excel, and Lux, HUL has a near-monopoly in several product
categories, where it is the market leader by a wide margin.

7. Asian Paints
•Sector: Paints and Coatings
•Monopoly Type: Market Leader (Near-Monopoly)

8. Pidilite Industries
•Sector: Adhesives (Specifically Fevicol)
•Monopoly Type: Market Leader (Near-Monopoly)

9. Zomato/Swiggy
•Sector: Food Delivery
•Monopoly Type: Duopoly (Near-Monopoly)
 Types of Monopolies
Natural Monopolies : A natural monopoly exists when a
variety of factors make competition unworkable,
financially unfeasible or impossible.

Geographic Monopolies : When only one business provides products or services to a

local area, that business is a geographic monopoly.

Technological Monopolies : A business that's first to market a product or service may

get a patent or copyright. That legal protection makes the business a technological
monopoly.

Governments Are Almost Always Monopolies : Governments must exist as

monopolies by necessity, as constituents can't follow the rules of two simultaneous
governing bodies.
Examples of Monopoly in India
1) Majority of electricity companies
2) Railways
3) Oil marketing companies - IOCL, BPCL, HPCL all of
them government companies.
4) Coal India, largest market share in production and
marketing of coal
5) Hindustan Aeronautics Limited, India's only manufacturer
of jets and helicopters
10.1 Monopoly
Average Revenue and Marginal Revenue
● marginal revenue Change in revenue resulting from a one-unit increase in
output.

Consider a firm facing the following demand curve: P = 6 − Q

TABLE 10.1 TOTAL, MARGINAL, AND AVERAGE REVENUE

TOTAL REVENUE MARGINAL REVENUE AVERAGE REVENUE
PRICE (P) QUANTITY (Q) (R) (MR) (AR)
$6 0 $0 — —
5 1 5 $5 $5
4 2 8 3 4
3 3 9 1 3
2 4 8 −1 2
1 5 5 −3 1
In a monopoly, both the Average Revenue (AR) and Marginal Revenue (MR) curves are
downward sloping. This is due to the relationship between the price a monopolist can
charge and the quantity it can sell.
Why This Happens in a Monopoly:
•Market Power: In a monopoly, the firm has significant market power and faces the entire
market demand curve. To sell more, it must lower the price, which reduces revenue on
previous units as well as the additional units.
•Lack of Competition: Unlike in perfect competition, where the price remains constant, a
monopolist’s pricing decision directly influences the quantity sold. This interdependence
leads to a declining MR as more units are sold.

Example:
•Suppose a monopolist sells 10 units at ₹100 each. The total revenue is ₹1000.
•To sell the 11th unit, the monopolist reduces the price to ₹95. Now, the total revenue
is ₹1045.
•The MR for the 11th unit is ₹45 (₹1045 - ₹1000), not ₹95, because the monopolist
loses ₹5 on each of the first 10 units due to the price reduction.
 FIGURE 10.1
AVERAGE AND
MARGINAL REVENUE
Average and marginal
revenue are shown for
the demand curve
P = 6 − Q.

A monopolistic firm is a price maker and can

increase its sales only when the price of the good
falls. Therefore, when price or AR falls, the firm
can increase the quantity sold. Thus, under
monopoly AR curves slopes downward.
The Monopolist’s Price and Output Graphically

Price MC
Monopolist
$36 price
30
24
18
12
6 D
0
6 1 2 3 4 5 6 7 8 9 10
12 MR
A Monopolist Making a Profit

Price MC

ATC
PM A
Profit
CM B

MR D
0 QM Quantity
A Monopolist Breaking Even

Price MC
ATC

PM

MR D
0 QM Quantity
A Monopolist Making a Loss

Price MC ATC

CM B
Loss A
PM

MR D
0 QM Quantity
The Monopolist’s Output Decision

FIGURE 10.2
PROFIT IS MAXIMIZED WHEN
MARGINAL REVENUE
EQUALS MARGINAL COST
Q* is the output level at
which MR = MC.
If the firm produces a smaller
output—say, Q1—it sacrifices
some profit because the
extra revenue that could be
earned from producing and
selling the units between Q1
and Q* exceeds the cost of
producing them.
Similarly, expanding output
from Q* to Q2 would reduce
profit because the additional
cost would exceed the
additional revenue.
We can also see algebraically that Q* maximizes profit. Profit π is the difference
between revenue and cost, both of which depend on Q:

𝜋 𝑄 =𝑅 𝑄 −𝐶 𝑄

As Q is increased from zero, profit will increase until it reaches a maximum and
then begin to decrease. Thus the profit-maximizing Q is such that the
incremental profit resulting from a small increase in Q is just zero (i.e., Δπ /ΔQ
= 0). Then
∆𝜋Τ∆𝑄 = ∆𝑅 Τ∆𝑄 − ∆𝐶 Τ∆𝑄 = 0

But ΔR/ΔQ is marginal revenue and ΔC/ΔQ is marginal cost. Thus the profit-
maximizing condition is that

MR − MC = 0, or MR = MC
 Ram is a producer in a monopoly industry. His demand curve, total revenue
curve, marginal revenue curve and total cost curve are given as follows:
Q = 160 - 4P MR = 40 - 0.5Q TR = 40Q - 0.252 TC = 4Q MC = 4
Refer to Scenario. How much The price of his product will be:
output will Ram produce?
A) 0 A) $4.
B) 22 B) $22.
C) 56
D) 72 C) $32.
E) none of the above D) $42.
Answer: D
E) $72.
Answer: B
 A Rule of Thumb for Pricing

∆𝑅 ∆ 𝑃𝑄
MR = =
∆𝑄 ∆𝑄
Note that the extra revenue from an incremental unit of quantity, Δ(PQ)/ΔQ, has two
components:
1. Producing one extra unit and selling it at price P brings in revenue (1)(P) = P.
2. But because the firm faces a downward-sloping demand curve, producing and selling this
extra unit also results in a small drop in price ΔP/ΔQ, which reduces the revenue from all
units sold (i.e., a change in revenue Q[ΔP/ΔQ]).
Thus,

∆𝑃 𝑄 ∆𝑃
MR = 𝑃 + 𝑄 =𝑃+𝑃
∆𝑄 𝑃 ∆𝑄
(Q/P)(ΔP/ΔQ) is the reciprocal of the elasticity of demand, 1/Ed,
measured at the profit-maximizing output, and

MR = 𝑃 + 𝑃 1Τ𝐸𝑑

Now, because the firm’s objective is to maximize profit, we can set marginal
revenue equal to marginal cost:

𝑃 + 𝑃 1Τ𝐸𝑑 = MC

which can be rearranged to give us

𝑃 − MC 1
=− (10.1)
𝑃 𝐸𝑑

Equivalently, we can rearrange this equation to express price directly as a

markup over marginal cost:

MC
𝑃= (10.2)
1 + 1Τ𝐸𝑑
 Markup Rule
A Rule of Thumb for Pricing
MC
𝑃=
1 + 1Τ𝐸𝑑
Elasticity of Demand (Ed): This measures how sensitive the quantity demanded is to changes in price. If
demand is elastic (∣Ed∣>1), consumers are sensitive to price changes, and the monopolist will set a lower
markup. If demand is inelastic (∣Ed∣<1), consumers are less sensitive to price changes, allowing the
monopolist to set a higher markup.
For a monopolist, if the marginal cost (MC) is ₹40 and the price elasticity of demand
(Ed) is -4, the optimal price (P) set using the markup rule would be:
•A) ₹50
•B) ₹53.33
•C) ₹60
•D) ₹66.67

•Answer: A) ₹50
A monopolist firm faces a demand with constant elasticity of −2.0. It has a constant
marginal cost of $20 per unit and sets a price to maximize profit. If marginal cost
should increase by 25%, would the price charged also rise by 25%?
 The Effect of a Tax
Suppose a specific tax of t dollars per unit is levied, so that the monopolist must remit t
dollars to the government for every unit it sells. If MC was the firm’s original marginal cost,
its optimal production decision is now given by

MR = MC + 𝑇

FIGURE 10.5
EFFECT OF EXCISE TAX ON
MONOPOLIST
With a tax t per unit, the firm’s
effective marginal cost is increased by
the amount t to MC + t.
In this example, the increase in price
ΔP is larger than the tax t.
The demand for tickets to the Katy Perry concert (Q) is given as follows:
Q = 120,000 - 2,000P
The marginal revenue is given as:
MR = 60 - .001Q
The stadium at which the concert is planned holds 60,000 people. The marginal cost of each
additional concert goer is essentially zero up to 60,000 fans, but becomes infinite beyond that point.
➢ Refer to Scenario. Given the information above, what are the profit maximizing number of
tickets sold and the price of tickets?
A) 0, $60
B) 20,000, $50
C) 40,000, $40
D) 60,000, $30
E) 80,000, $20

Answer: D
➢ Refer to Scenario. Suppose that the municipal stadium authority imposes a
tax of $10 per ticket on the concert promoters. Given the information above,
the profit maximizing ticket price would:
A) increase by $10.
B) increase by $5.
C) not change.
D) decrease by $5.
E) decrease by $10.
Answer: B
The next term, ΔC1/ΔQ1, is marginal cost at Plant 1, MC1. We thus have
MR − MC1 = 0, or

MR = MC1
Similarly, we can set incremental profit from output at Plant 2 to zero,
MR = MC2
Putting these relations together, we see that the firm should produce so that

MR = MC1 = MC2 (10.3)

 FIGURE 10.6
PRODUCING WITH TWO PLANTS
A firm with two plants
maximizes profits by choosing
output levels Q1 and Q2 so
that marginal revenue MR
(which depends on total
output) equals marginal costs
for each plant, MC1 and MC2.
 The firm faces the following demand curve:

P = 700 − 5Q

where Q is total output – i.e., Q = Q1 + Q2.

a. Indicate the profit-maximizing output for each factory, total output, and
price.

b. Calculate the values of Q1, Q2, Q, and P that maximize profit.

The average revenue curve is the demand curve,
P = 700 − 5Q.
For a linear demand curve, the marginal revenue curve has the same intercept as the demand curve
and a slope that is twice as steep:
MR = 700 − 10Q.
To find the monopoly price, P, substitute for Q in the
demand equation:
P = 700 − 5(30), or
PM = $550.
10.2 Monopoly Power
FIGURE 10.7
THE DEMAND FOR
TOOTHBRUSHES
Part (a) shows the market
demand for toothbrushes.
Part (b) shows the demand
for toothbrushes as seen by
Firm A.
At a market price of $1.50,
elasticity of market demand is
−1.5.
Firm A, however, sees a
much more elastic demand
curve DA because of
competition from other firms.
At a price of $1.50, Firm A’s
demand elasticity is −6.
Still, Firm A has some
monopoly power: Its profit-
maximizing price is $1.50,
which exceeds marginal cost.
 Measuring Monopoly Power

● Lerner Index of Monopoly Power Measure of monopoly power

calculated as excess of price over marginal cost as a fraction of price.

𝑳 = 𝑷 − MC Τ𝑷

𝑳 = −𝟏Τ𝑬𝒅
What is the value of the Lerner index under perfect competition?
A) 1
B) 0
C) infinity
D) two times the price
Answer: B

The more elastic the demand facing a firm,

A) the higher the value of the Lerner index.
B) the lower the value of the Lerner index.
C) the more monopoly power it has.
D) the higher its profit.
Answer: B
A monopolist faces the demand curve P = 11 − Q, where P is measured in dollars per unit and
Q in thousands of units. The monopolist has a constant average cost of $6 per unit.
a. Draw the average and marginal revenue curves and the average and marginal cost curves. What
are the monopolist’s profit-maximizing price and quantity? What is the resulting profit? Calculate
the firm’s degree of monopoly power using the Lerner index.

Because demand (average revenue) is P = 11 − Q, the marginal revenue function is MR = 11 − 2Q. Also,
because average cost is constant, marginal cost is constant and equal to average cost, so MC = 6.
To find the profit-maximizing level of output, set marginal revenue equal to marginal cost:
11 − 2Q = 6, or Q = 2.5.
That is, the profit-maximizing quantity equals 2500 units. Substitute the profit-maximizing quantity into the
demand equation to determine the price:
P = 11 − 2.5 = $8.50.

Profits are equal to total revenue minus total cost,

 = TR − TC = PQ − (AC)(Q), or
 = (8.50)(2.5) − (6)(2.5) = 6.25, or $6250.
b. A government regulatory agency sets a price ceiling of $7 per unit. What
quantity will be produced, and what will the firm’s profit be? What happens
to the degree of monopoly power?

7 = 11 − Q, or Q = 4.
Therefore, the firm will choose to produce 4000 units rather than the 2500 units without the price
ceiling. Also, the monopolist will choose to sell its product at the $7 price ceiling because $7 is the
highest price that it can charge, and this price is still greater than the constant marginal cost of $6,
resulting in positive monopoly profit.
Profits are equal to total revenue minus total cost:
 = 7(4000) − 6(4000) = $4000.

The degree of monopoly power falls to

P − MC 7 − 6
= = 0.143.
P 7
The Rule of Thumb for Pricing MC
𝑃=
1 + 1Τ𝐸𝑑

FIGURE 10.8
ELASTICITY OF DEMAND AND PRICE MARKUP
The markup (P − MC)/P is equal to minus the inverse of the elasticity of demand.
If the firm’s demand is elastic, as in (a), the markup is small and the firm has little
monopoly power.
The opposite is true if demand is relatively inelastic, as in (b).
EXAMPLE 10.3 MARKUP PRICING: SUPERMARKETS TO
DESIGNER JEANS
Although the elasticity of market demand for food is
small (about −1), no single supermarket can raise its
prices very much without losing customers to other
stores.
The elasticity of demand for any one supermarket is
often as large as −10. We find P = MC/(1 − 0.1) =
MC/(0.9) = (1.11)MC.
The manager of a typical supermarket should set prices about 11 percent
above marginal cost.
Small convenience stores typically charge higher prices because its customers
are generally less price sensitive.
Because the elasticity of demand for a convenience store is about −5, the
markup equation implies that its prices should be about 25 percent above
marginal cost.
With designer jeans, demand elasticities in the range of −2 to −3 are typical.
This means that price should be 50 to 100 percent higher than marginal cost.
 10.3 Sources of Monopoly Power
Three factors determine a firm’s elasticity of demand.

1. The elasticity of market demand. Because the firm’s own demand will be at least
as elastic as market demand, the elasticity of market demand limits the potential
for monopoly power. The less elastic its demand curve, the more monopoly
power a firm has.

2. The number of firms in the market. If there are many firms, it is unlikely that any
one firm will be able to affect price significantly.

3. The interaction among firms. Even if only two or three firms are in the market,
each firm will be unable to profitably raise price very much if the rivalry among
them is aggressive, with each firm trying to capture as much of the market as it
can.
10.4 The Social Costs of Monopoly Power
FIGURE 10.10
DEADWEIGHT LOSS FROM
MONOPOLY POWER
The shaded rectangle and
triangles show changes in
consumer and producer surplus
when moving from competitive
price and quantity, Pc and Qc,
to a monopolist’s price and
quantity, Pm and Qm.
Because of the higher price,
consumers lose A + B
and producer gains A − C. The
deadweight loss is B + C.
A natural monopoly occurs when a single firm can produce the entire output for a market at a lower cost than
multiple firms could, due to economies of scale. This typically happens in industries with high fixed costs and
low marginal costs, making it inefficient for multiple firms to compete.
Examples of Natural Monopolies in the Indian Context:
1.Indian Railways:
Indian Railways is a classic example of a natural monopoly in India. The infrastructure required to build
and maintain a nationwide railway network involves significant fixed costs, including tracks, stations, and
trains.
2.Electricity Distribution:
Historically, electricity distribution in many parts of India has been managed by state electricity boards or
distribution companies.
3.Water Supply:
Municipal water supply is another example where a natural monopoly often exists. The cost of
establishing a water distribution network (pipes, treatment plants, etc.) is so high that it doesn't make
sense to have multiple competing suppliers.
4.Oil and Gas Pipelines:
1. The construction and maintenance of oil and gas pipelines involve high fixed costs. In India, companies
like GAIL (Gas Authority of India Limited) operate as natural monopolies in specific regions for gas
distribution due to the efficiency of having a single pipeline network.
Natural Monopoly

● natural monopoly Firm that can produce the entire output of the
market at a cost lower than what it would be if there were several firms.

FIGURE 10.12
REGULATING THE PRICE OF A
NATURAL MONOPOLY
A firm is a natural monopoly because it
has economies of scale (declining
average and marginal costs) over its
entire output range.
If price were regulated to be Pc the firm
would lose money and go out of
business.
Setting the price at Pr yields the largest
possible output consistent with the
firm’s remaining in business; excess
profit is zero.
Refer to Figure. At output Qm, and assuming that the
monopoly has set her price to maximize profit, the
consumer surplus is:
A) CDE.
B) BDEF.
C) ADEG.
D) 0DEQm.
E) none of the above
Answer: A

Refer to Figure. In moving from the competitive level of

output and price to the monopoly level of output and
price, the monopolist is able to add to producer surplus:
A) the area BCEF.
B) the area BCEF less the area GFH.
C) the area BCEH.
D) the area BCEH less the area GFH.
E) none of the above
Answer: B
Company A has a monopoly in the edible nuts industry. The demand curve, marginal revenue and
marginal cost curve for edible nuts are given as follows:
P = 360 - 4Q MR = 360 - 8Q MC = 4Q

What level of output maximizes the sum of consumer surplus and producer surplus?
A) 0
B) 30
C) 45
D) 60
E) none of the above
Answer: C

What is the profit maximizing level of output?

A) 0
B) 30
C) 45
D) 60
E) none of the above
Answer: B
Refer to Figure. If the monopolist is not regulated, the
price will be set at:
A) P1.
B) P2.
C) P3.
D) P4.
E) none of the above
Answer: B

Refer to Figure. Suppose that the government decides to

limit monopoly power with price regulation. If the
government sets the price at the competitive level, it will
set the price at:
A) P1.
B) P2.
C) P3.
D) P4.
E) none of the above
Answer: D
Ram is the city planner in a New Delhi. The city is considering a proposal to award an exclusive contract to
Clear Vision, Inc., a cable television carrier. Ram has discovered that an economic planner hired a year
before has generated the demand, marginal revenue, total cost and marginal cost functions given below:
P = 28 - 0.0008Q
MR = 28 - 0.0016Q
TC = 120,000 + 0.00062
MC = 0.0012Q,
where Q = the number of cable subscribers and P = the price of basic monthly cable service. Conditions
change very slowly in the community so that Mr. Ram considers the cost and demand functions to be
reasonably valid for present conditions. Mr. Ram knows relatively little economics and has hired you to
answer the questions listed below.

a. What price and quantity would be expected if the firm is allowed to operate completely
unregulated?
b. Mr. Ram has asked you to recommend a price and quantity that would be socially efficient.
Recommend a price and quantity to Ram using economic theory to justify your answer.
a. Without regulation we would expect the firm to behave as a monopolist, equating MR and MC.
28 - 0.0016Q = 0.0012Q
Q = 10,000
P = 28 - 0.0008(10,000)
P = $20
b. Economic theory suggests that price should be equal to MC to achieve allocative efficiency.
P = 28 - 0.0008Q
MC = 0.0012Q
28 - 0.0008Q = 0.0012Q
28 = 0.002Q
Q = 14,000
P = 28 - 0.0008(14,000)
P = 28 - 11.20
P = 16.80
The industry demand curve for a particular market is:
Q = 1800 - 200P.
The industry exhibits constant long-run average cost at all levels of output,
regardless of the market structure. Long-run marginal cost is a constant $1.50 per
unit of output. Calculate market output, price (if applicable), consumer surplus,
and producer surplus (profit) for each of the scenarios below. Compare the
economic efficiency of each possibility.

a. Competitive Market
b. Pure Monopoly
Answer: Since LAC is constant, LMC is also constant
and equal to LAC. LMC = $1.50
a.
Under perfect competition P = LMC. We begin by solving
P as a function of Q:
Q = 1800 - 200P
Q - 1800 = -200P
P = 9 - 0.005Q
Under competition P = LMC
9 - 0.005Q = 1.5
-0.005Q = -7.5
Q = 1500

P = 9 - 0.005(1500)
P = 9 - 7.5 = $1.50
P = LMC = LAC so that p (producer surplus) = 0
Consumer surplus is the area under the demand curve
above market price, as indicated in the figure.
b.
Under monopoly MR = MC
P = 9 - 0.005Q
MR = 0 - 0.01Q
Setting MR = MC
9 - 0.01Q = 1.5
-0.01Q = -7.5
Q = 750

P = 9 - 0.005(750)
P = 9 - 3.75
P = 5.25

π = (5.25 - 1.50) × 750

π = 2812.50
To find consumer surplus, find area of the triangle under the demand curve and
above price.
CS = (9 - 5.25)(750)(0.5) = 1,406.25.
The sum of consumer surplus and producer surplus is 1,406.25 + 2,812.50 =
4,218.75.
The following table shows the demand curve facing a monopolist who produces at a constant
marginal cost of $10:

a. Calculate the firm’s marginal revenue curve.

Price Quantity
18 0
16 4
14 8
12 12
10 16
8 20
6 24
4 28
2 32
0 36
b. What are the firm’s profit-maximizing output and price? What is its profit?

c. What would the equilibrium price and quantity be in a competitive industry?

For a competitive industry, price would equal marginal cost at equilibrium. Setting the expression for price
equal to a marginal cost of 10:
18 − 0.5Q = 10, so that Q = 16 and P = $10.
Note the increase in the equilibrium quantity and decrease in price compared to the monopoly solution.
d. What would the social gain be if this monopolist were forced to produce and price at the
competitive equilibrium? Who would gain and lose as a result?

The social gain arises from the elimination of deadweight loss. When price drops from $14 to $10,
consumer surplus increases by area A + B + C = 8(14 − 10) + (0.5)(16 − 8)(14 − 10) = $48. Producer
surplus decreases by area A + B = 8(14 − 10) = $32. So consumers gain $48 while producers lose $32.
Deadweight loss decreases by the difference, $48 − 32 = $16. Thus the social gain if the monopolist were
forced to produce and price at the competitive level is $16.
 Case Study on Apple Inc. in 2023
1. Apple's Market Power and Dominance
A. Premium Smartphone Market:
•Apple continues to dominate the premium segment of the smartphone market. The case might discuss how Apple
maintains a large share of this market despite high prices. This is a classic indicator of market power where Apple’s brand
and ecosystem allow it to dictate terms in the market.
B. Ecosystem Lock-In:
•The case likely details how Apple's ecosystem (iOS, App Store, iCloud, Apple Music, etc.) creates a "walled garden" that
locks consumers into its products. This reduces competition because even if another company offers a better or cheaper
product, the cost of switching out of Apple's ecosystem is too high for most consumers.
C. High Switching Costs:
•The integration of Apple's hardware with its software and services creates significant switching costs. Consumers are less
likely to switch to a competitor, which further consolidates Apple’s market power. For instance, iMessage, FaceTime, and
the seamless connectivity between Apple devices are strong deterrents against switching to non-Apple products.
2. Pricing Strategies and Elasticity
A. Premium Pricing Strategy:
•The case probably outlines Apple’s ability to maintain high prices for its products. This can be analyzed through the lens
of elasticity of demand. Apple’s products often have inelastic demand, meaning that even when prices increase, the
quantity demanded does not decrease significantly. This is a key feature of monopoly pricing.
B. Price Discrimination:
•Apple engages in price discrimination across different regions and product lines (e.g., different storage capacities of the
iPhone). The case might illustrate how Apple uses its market power to charge different prices to different consumers
based on their willingness to pay.
3. Barriers to Entry
A. Technological Barriers:
•The case is likely to highlight the significant technological barriers Apple has created. Competitors find it difficult to
replicate Apple’s design, innovation, and integration of hardware and software. This is a crucial aspect of maintaining
monopoly power.
B. Economies of Scale:
•Apple’s massive scale gives it cost advantages that are difficult for competitors to match. The case might show how
Apple’s global supply chain and economies of scale contribute to its ability to undercut potential competitors or sustain its
premium pricing strategy.
C. Intellectual Property:
•Apple’s extensive patent portfolio and aggressive legal strategies protect its innovations, making it harder for competitors
to enter the market. The case likely discusses how Apple’s IP portfolio is a barrier to entry that supports its market
dominance.
4. Network Effects
A. App Store and Developer Ecosystem:
•The case might explore how the App Store benefits from network effects. As more users buy Apple devices, more
developers create apps for iOS, which in turn attracts more users. This positive feedback loop strengthens Apple’s market
position.
B. Service Integration:
•Apple’s services (e.g., Apple Music, iCloud, Apple Pay) are designed to work seamlessly with its hardware, creating
additional network effects. As more people use these services, they become more valuable, reinforcing consumer loyalty
to Apple’s products.
5. Regulatory Challenges
A. Antitrust Scrutiny:
•The case probably touches on the increasing regulatory scrutiny Apple faces, particularly around its App Store
practices. Governments and regulatory bodies may view Apple’s control over the App Store as monopolistic, given
that it charges developers a significant commission (often 30%) and controls the rules and access to the iOS user
base.
B. Legal Battles:
•The case may provide examples of legal battles Apple has faced (such as with Epic Games) over its App Store
policies, which could be seen as monopolistic practices. These legal challenges can be analyzed in the context of
how monopolies operate under the threat of regulation.
6. Innovation and Competitive Strategy
A. Continuous Innovation:
•Apple’s strategy of continuous innovation is a key theme. The case might discuss how Apple invests heavily in R&D
to stay ahead of competitors, creating new products that reinforce its ecosystem and market power.
B. Response to Competitive Threats:
•The case could explore how Apple responds to competitive threats, such as from Android manufacturers, and
whether its strategies are aimed at maintaining its monopoly position. For example, introducing lower-cost
products like the iPhone SE could be seen as a way to prevent competitors from eroding its market
 What Does Apple's Falling Revenue Indicate?

Source: https://www.youtube.com/watch?v=U6rLupkd_Jo&t=67s