I n t h I s c h a p t e r y o u w I l L

X.
Mark the area
equal to consumer surplus and call it 
Y.
Mark the
area equal to the deadweight loss and call it 
Z.
c.
Now suppose that the monopolist can perfectly
price discriminate. What is the monopolist’s profit?
(Give your answer in terms of 
X, Y,
and 
Z.
)
d.
What is the change in the monopolist’s profit from
price discrimination? What is the change in total
surplus from price discrimination? Which change is
larger? Explain. (Give your answer in terms of 
X, Y,
and 
Z.
)
e.
Now suppose that there is some cost of price
discrimination. To model this cost, let’s assume that
the monopolist has to pay a fixed cost 
C
in order to
price discriminate. How would a monopolist make
the decision whether to pay this fixed cost? (Give
your answer in terms of 
X, Y, Z,
and 
C.
)

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C H A P T E R 1 5
M O N O P O LY
3 4 7
f.
How would a benevolent social planner, who cares
about total surplus, decide whether the monopolist
should price discriminate? (Give your answer in
terms of 
X, Y, Z,
and 
C.
)
g.
Compare your answers to parts (e) and (f). How
does the monopolist’s incentive to price
discriminate differ from the social planner’s? Is it
possible that the monopolist will price discriminate
even though it is not socially desirable?

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I N T H I S C H A P T E R
Y O U W I L L . . .
L e a r n a b o u t t h e
p r i s o n e r s ’ d i l e m m a
a n d h o w i t a p p l i e s
t o o l i g o p o l y a n d
o t h e r i s s u e s
S e e w h a t m a r k e t
s t r u c t u r e s l i e
b e t w e e n m o n o p o l y
a n d c o m p e t i t i o n
E x a m i n e w h a t
o u t c o m e s a r e
p o s s i b l e w h e n a
m a r k e t i s a n
o l i g o p o l y
C o n s i d e r h o w t h e
a n t i t r u s t l a w s t r y t o
f o s t e r c o m p e t i t i o n
i n o l i g o p o l i s t i c
m a r k e t s
If you go to a store to buy tennis balls, it is likely that you will come home with one
of four brands: Wilson, Penn, Dunlop, or Spalding. These four companies make
almost all of the tennis balls sold in the United States. Together these firms deter-
mine the quantity of tennis balls produced and, given the market demand curve,
the price at which tennis balls are sold.
How can we describe the market for tennis balls? The previous two chapters
discussed two types of market structure. In a competitive market, each firm is so
small compared to the market that it cannot influence the price of its product and,
therefore, takes the price as given by market conditions. In a monopolized market,
a single firm supplies the entire market for a good, and that firm can choose any
price and quantity on the market demand curve.
The market for tennis balls fits neither the competitive nor the monopoly
model. Competition and monopoly are extreme forms of market structure. Com-
petition occurs when there are many firms in a market offering essentially iden-
tical products; monopoly occurs when there is only one firm in a market. It is
O L I G O P O L Y
3 4 9

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3 5 0
PA R T F I V E
F I R M B E H AV I O R A N D T H E O R G A N I Z AT I O N O F I N D U S T R Y
natural to start the study of industrial organization with these polar cases, for they
are the easiest cases to understand. Yet many industries, including the tennis ball
industry, fall somewhere between these two extremes. Firms in these industries
have competitors but, at the same time, do not face so much competition that they
are price takers. Economists call this situation 
imperfect competition.
In this chapter we discuss the types of imperfect competition and examine a