BUS 540 Module 4 Competition and Monopoly Example

One Firm Takes the Price, the Other Sets It: Perfect Competition and Monopoly on a Kansas Wheat Farm and a Rural Fiber Network

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MBA Program, Aspen University

BUS 540: Managerial Economics

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Month Day, Year

One Firm Takes the Price, the Other Sets It: Perfect Competition and Monopoly on a Kansas Wheat Farm and a Rural Fiber Network

Two composite businesses in south central Kansas illustrate opposite ends of market structure. Prairie Gold Farms grows hard red winter wheat on 3,200 acres and sells it to the local elevator at whatever price the market offers. Ridgeline Fiber, a small company that built a fiber network in a town of about 6,000 people with help from a state broadband grant, is the only provider offering high-speed internet there; the alternatives are a slow satellite service and an aging DSL line. This paper compares how each firm should make its pricing and output decisions and what the differences mean for customers and the economy.

The Price Taker

Perfect competition describes markets with many sellers of an identical product, easy entry and exit, and buyers and sellers who know prices (Baye & Prince, 2022). Wheat comes close. Prairie Gold's harvest is a tiny share of national and world supply, and its wheat is interchangeable with any other farm's of the same grade. If it asked a penny more than the market price, the elevator would buy elsewhere. The farm is a price taker.

For a price taker, the profit-maximizing rule is simple: produce where marginal cost equals price. Prairie Gold's decisions concern how many acres to plant and how intensively to fertilize and protect them. At a price of $6.00 a bushel, an extra application of fertilizer that adds four bushels an acre at a cost of $18 an acre is worthwhile, since it adds $24 of revenue. If the price fell to $4.00, the same application would add only $16 and would no longer pay. The farm cannot change the price; it can only adjust how much it produces at that price. In the long run, entry and exit drive economic profit toward zero, so farms survive by keeping costs low.

The Local Monopolist

Ridgeline Fiber's position is different. Building a fiber network requires large fixed costs, in this case about $7 million, while serving an additional household costs little. Once one network exists in a small town, a second is unlikely to be built, because it would have to share a small market while duplicating the fixed costs. Ridgeline is therefore a local monopolist for high-speed internet, facing a downward-sloping demand curve: at higher prices, fewer households subscribe.

A firm facing downward-sloping demand must lower its price to attract more customers, and the lower price applies to all subscribers, not only the new ones. As a result, marginal revenue, the revenue added by one more subscriber, is less than the price.

Finding the Profit-Maximizing Price

Ridgeline's marginal cost per subscriber, including network maintenance, customer service and the wholesale internet connection, is about $20 a month. A survey of households and the take-up rates at a similar provider support the demand estimates below.

Profit is maximized where marginal revenue equals marginal cost. Lowering the price from $95 to $85 adds 250 subscribers and $27 of revenue for each, more than the $20 each costs to serve, so the move raises profit. Lowering it again to $75 adds only $7 of revenue per added subscriber, less than the $20 cost, so profit falls. The profit-maximizing price is therefore $85, where monthly profit before fixed costs reaches $110,500, and the table's last column confirms it. Note that revenue alone peaks at $75; a firm that maximized revenue rather than profit would choose the wrong price.

The Cost to Customers and Efficiency

If Ridgeline priced at its marginal cost of $20, nearly every household that values high-speed internet above $20 a month would subscribe. At $85, about 1,700 households subscribe. Households that would pay between $20 and $85 but not more are priced out; extending the demand schedule's pattern of about 250 households per $10 suggests roughly 1,600 households fall in that range. The value they would have received above the $20 it costs to serve them is lost to the economy, a deadweight loss. Posner (1975) argued that the true social cost of monopoly can exceed this triangle, because firms spend real resources competing to obtain and protect monopoly positions, for example in winning grants or franchises. Assuming their willingness to pay is spread evenly between $20 and $85, the monthly loss is roughly half of $65 times 1,600, or about $52,000.

Market Power in the Wider Economy

Ridgeline's situation is one small example of a broader pattern. De Loecker et al. (2020), using financial data for publicly traded U.S. firms, estimated that the average markup of price over marginal cost rose from about 21% in 1980 to about 61% in 2016, with much of the increase concentrated in firms with the highest markups. Rising market power, they argued, has implications for wages, investment and the share of income going to profits. Local monopolies in infrastructure, such as Ridgeline's, have long existed because of high fixed costs, which is why they are often regulated or publicly funded.

The Constraints Ridgeline Faces

Ridgeline is not a pure textbook monopolist. Its state grant caps standard service at $95 a month, a limit that does not bind at the chosen price, and requires a low-income plan at $30 for households that qualify for public assistance, a condition designed to reduce deadweight loss. It also faces potential competition from improving satellite and fixed wireless services, which limits how high it can price over time.

Implications for Each Manager

For Prairie Gold, the economic lesson is that profit comes from cost control and production decisions, since the market sets price. For Ridgeline, the lesson is that pricing is a strategic choice with consequences for customers, the community and the terms of its public funding. A low-income tier, which serves households priced out at $85 while charging more than marginal cost, increases both subscribers and profit while reducing deadweight loss.

Conclusion

The wheat farm and the fiber provider face the same goal, maximizing profit, but different market positions. The farm takes price and adjusts output to marginal cost; the provider sets price where marginal revenue meets marginal cost and, without constraints, would charge well above the cost of service. The comparison shows why market structure shapes managerial decisions and why monopoly power invites public conditions.

References

Baye, M. R., & Prince, J. T. (2022). Managerial economics and business strategy (10th ed.). McGraw Hill.

De Loecker, J., Eeckhout, J., & Unger, G. (2020). The rise of market power and the macroeconomic implications. Quarterly Journal of Economics, 135(2), 561-644. https://doi.org/10.1093/qje/qjz041

Posner, R. A. (1975). The social costs of monopoly and regulation. Journal of Political Economy, 83(4), 807-827. https://doi.org/10.1086/260357