monopoly

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Copyright2004 South-Western

1515Monopoly

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Copyright 2004 South-Western

While a competitive firm is aprice taker, a

monopoly firm is aprice maker.

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A firm is considered a monopoly if . . .

it is the sole seller of its product.

its product does not have close substitutes.

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WHY MONOPOLIES ARISE

The fundamental cause of monopoly is barriers

to entry.

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WHY MONOPOLIES ARISE

Barriers to entry have three sources:

Ownership of a key resource.

The overnment ives a sinle firm the e!clusive

riht to produce some ood.

"osts of production make a sinle producer more

efficient than a lare number of producers.

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Monopoly Resources

Althouh e!clusive ownership of a key

resource is a potential source of monopoly, in

practice monopolies rarely arise for this reason.

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Government-Create Monopol!es

#overnments may restrict entry by ivin a

sinle firm the e!clusive riht to sell a

particular ood in certain markets.

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Government-Create Monopol!es

$atent and copyriht laws are two important

e!amples of how overnment creates a

monopoly to serve the public interest.

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Natural Monopol!es

An industry is a natural monopoly when a

sinle firm can supply a ood or service to an

entire market at a smaller cost than could two

or more firms.

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Natural Monopol!es

A natural monopolyarises when there are

economies of scale over the relevant rane of

output.

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"!#ure $ Econom!es o% Scale as a Cause o% Monopoly


Quantity of Output

Avera#etotal

cost

&

Cost

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HOW MONOPOLIES MA'E PRO()C*IONAN( PRICING (ECISIONS

%onopoly versus "ompetition

%onopoly

&s the sole producer

'aces a downward(slopin demand curve &s a price maker

)educes price to increase sales

"ompetitive 'irm

&s one of many producers

'aces a hori*ontal demand curve

&s a price taker

+ells as much or as little at same price

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"!#ure + (eman Curves %or Compet!t!ve an Monopoly"!rms


Quantity of Output

(eman

(a) Co!petiti"e #ir!$s %e!an& Cur"e (') Monopolist$s %e!an& Cur"e

&

rie

Quantity of Output&

rie

(eman

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A Monopoly,s Revenue

Total )evenue

P Q = TR

Averae )evenue

TR/Q = AR = P

%arinal )evenue

TR/Q = MR

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*ale $ A Monopoly,s *otal. Avera#e.an Mar#!nal Revenue

Copyright2004 South-Western

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A %onopolys %arinal )evenue

A monopolists marinal revenue is always less

thanthe price of its ood.

The demand curve is downward slopin. When a monopoly drops the price to sell one more unit,

the revenue received from previously sold units also

decreases.

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A %onopolys %arinal )evenue

When a monopoly increases the amount it sells, it

has two effects on total revenue -PQ.

The output effect/more output is sold, so Qis hiher. The price effect/price falls, soPis lower.

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"!#ure / (eman an Mar#!nal-Revenue Curves %or aMonopoly


Quantity of Water

rie

0$$

$&

1

2

3

45

6

/

+

$

&

7$

7+

7/

76

(eman

8avera#e

revenue9

Mar#!nal

revenue

$ + / 6 5 4 3 2

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Pro%!t Ma:!m!;at!on

A monopoly ma!imi*es profit by producin the

0uantity at which marinal revenue e0uals

marinal cost.

&t then uses the demand curve to find the pricethat will induce consumers to buy that 0uantity.

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"!#ure 6 Pro%!t Ma:!m!;at!on %or a Monopoly


QuantityQ Q&

Costs an&

*e"enue

(eman

Avera#e total cost

Mar#!nal revenue

Mar#!nal

cost

Monopoly

pr!ce

QMAX

e !ntersect!on o% t>emar#!nal-revenue curve

an t>e mar#!nal-cost

curve eterm!nes t>e

pro%!t-ma:!m!;!n#

?uant!ty = = =

A

+= = = = an t>en t>e emancurve s>o@s t>e pr!ce

cons!stent @!t> t>!s ?uant!ty=

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Pro%!t Ma:!m!;at!on

"omparin %onopoly and "ompetition

'or a competitive firm, price e0uals marinal cost.

P = MR = MC

'or a monopoly firm, price e!ceeds marinal cost.

P > MR = MC

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A Monopoly,s Pro%!t

$rofit e0uals total revenue minus total costs.

$rofit 1 TR( TC

$rofit 1 -TR2Q( TC2Q Q

$rofit 1 -P(ATC Q

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"!#ure 5 *>e Monopol!st,s Pro%!t


Monopoly

pro%!t

Avera#e

total

cost

Quantity

Monopoly

pr!ce

QMAX

&

Costs an&

*e"enue

(eman

Mar#!nal cost

Mar#!nal revenue

Avera#e total cost

!amples of $rice 4iscrimination %ovie tickets

Airline prices

4iscount coupons

'inancial aid

?uantity discounts

CONCL)SION *HE PREBALENCE

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CONCL)SIOND *HE PREBALENCEO" MONOPOLY

3ow prevalent are the problems of monopolies@ %onopolies are common.

%ost firms have some control over their prices

because of differentiated products. 'irms with substantial monopoly power are rare.

'ew oods are truly uni0ue.

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Summary

A monopoly is a firm that is the sole seller in itsmarket.

&t faces a downward(slopin demand curve for

its product. A monopolys marinal revenue is always

below the price of its ood.

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Summary

5ike a competitive firm, a monopoly ma!imi*esprofit by producin the 0uantity at which

marinal cost and marinal revenue are e0ual.

=nlike a competitive firm, its price e!ceeds itsmarinal revenue, so its price e!ceeds marinal

cost.

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Summary

A monopolists profit(ma!imi*in level ofoutput is below the level that ma!imi*es the

sum of consumer and producer surplus.

A monopoly causes deadweiht losses similarto the deadweiht losses caused by ta!es.

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Summary

$olicymakers can respond to the inefficienciesof monopoly behavior with antitrust laws,

reulation of prices, or by turnin the

monopoly into a overnment(run enterprise. &f the market failure is deemed small,

policymakers may decide to do nothin at all.

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Summary

%onopolists can raise their profits by charindifferent prices to different buyers based on

their willinness to pay.

$rice discrimination can raise economic welfareand lessen deadweiht losses.

monopoly

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