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Chapter 9Chapter 9MonopolyMonopoly

Microeconomics for TodayMicroeconomics for TodayIrvin B. TuckerIrvin B. Tucker

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What will I learn What will I learn in this chapter?in this chapter?

•How a monopolist How a monopolist determines what price to determines what price to charge and how much to charge and how much to produce to maximize produce to maximize profit or minimize lossprofit or minimize loss

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What is a monopoly?What is a monopoly?•Single sellerSingle seller•Unique productUnique product•Impossible entry Impossible entry into the marketinto the market

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What are the most What are the most common monopolies? common monopolies? •Local monopolies are Local monopolies are more common real-world more common real-world approximations of the approximations of the model than national or model than national or world market monopoliesworld market monopolies

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What does it mean to What does it mean to have a unique have a unique

product?product?•There are no close There are no close substitutes for the substitutes for the monopolist’s productmonopolist’s product

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What are some What are some examples of examples of

impossible entry?impossible entry?•Owner of a vital resourceOwner of a vital resource•Legal barriersLegal barriers•Economies of scaleEconomies of scale

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What is the advantage What is the advantage of economies of of economies of

scale?scale?•Because of economies of Because of economies of scale, a single firm in an scale, a single firm in an industry will produce output industry will produce output at a lower per-unit cost at a lower per-unit cost than two or more firmsthan two or more firms

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What is aWhat is anatural monopoly?natural monopoly?•An industry in which An industry in which the long-run average the long-run average cost of production cost of production declines throughout the declines throughout the entire marketentire market

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What is unique about What is unique about a natural monopoly?a natural monopoly?

•A single firm will produce A single firm will produce output at a lower per-unit output at a lower per-unit cost than two or more cost than two or more firms in the industryfirms in the industry

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What is a price What is a price maker?maker?

•A firm that faces a A firm that faces a downward-sloping downward-sloping demand curvedemand curve

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What is the difference What is the difference between monopoly and between monopoly and

perfect competition?perfect competition?•The D and MR curves of The D and MR curves of the monopolist are the monopolist are downward sloping; in downward sloping; in perfect competition they perfect competition they are horizontalare horizontal

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What is unique about What is unique about the demand curve the demand curve for a monopolist?for a monopolist?

•The monopolist demand The monopolist demand curve and the industry curve and the industry demand curve are one demand curve are one in the samein the same

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What determines price What determines price for a monopolist?for a monopolist?

•DemandDemand

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Why is MR < P for all Why is MR < P for all but the first unit of but the first unit of

output?output?•To sell additional units, To sell additional units, the price has to be the price has to be lowered; this price-cut lowered; this price-cut applies to all units, not applies to all units, not just the last unitjust the last unit

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Where does a Where does a monopolist produce to monopolist produce to

maximize profit or maximize profit or minimize losses?minimize losses?

MR = MCMR = MC

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Can a monopolist make Can a monopolist make a profit in the long-run?a profit in the long-run?

• If the positions of a If the positions of a monopolist’s demand and monopolist’s demand and cost curves give it a profit cost curves give it a profit and nothing disturbs these and nothing disturbs these curves, it can make a profit curves, it can make a profit in the long-runin the long-run

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What isWhat isprice discrimination?price discrimination?

•The practice of a seller The practice of a seller charging different prices charging different prices for the same product not for the same product not justified by cost differencesjustified by cost differences

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What is arbitrage?What is arbitrage?•The practice of earning a The practice of earning a profit by buying a good at profit by buying a good at a low price and reselling a low price and reselling the good at a higher pricethe good at a higher price

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MC

MR=MC

DMR

T1

- Price Discrimination -Market for average studentsP

Q

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MC

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DMR

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P

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- Price Discrimination -Market for superior students

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Is priceIs pricediscrimination unfair?discrimination unfair?•Many buyers benefit Many buyers benefit from the discrimination from the discrimination by not being excluded by not being excluded from purchasing the from purchasing the productproduct

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Is monopoly efficient?Is monopoly efficient?•A monopolist is inefficient A monopolist is inefficient because resources are because resources are underallocated to the underallocated to the production of its productproduction of its product

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Is perfectIs perfectcompetition efficient?competition efficient?•A perfectly competitive A perfectly competitive firm that produces firm that produces where P = MC achieves where P = MC achieves an efficient allocation of an efficient allocation of resourcesresources

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MCMR=MC

Pc

Perfect Competition

MR, D

P

Q

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Qm

MCMR=MC

DMR

Pm

MonopolistP

Q

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How does monopoly How does monopoly harm consumers?harm consumers?

•It charges a higher price It charges a higher price and produces a lower and produces a lower quantity than would be the quantity than would be the case in a perfectly case in a perfectly competitive situationcompetitive situation

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Qm

MCMR=MC

D

Pm

Impact of Monopolizing and IndustryP

Q

Pc

Qc

MR

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What is the case What is the case against monopoly?against monopoly?

•Higher priceHigher price•Charges a Price > MCCharges a Price > MC•Long-run economic profitLong-run economic profit•Alters the distribution of Alters the distribution of income to favor monopolistincome to favor monopolist

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