Minggu 7 : Pengantar

Ekonomi
Monopoli
Slides prepared by
Chandra Utama
What is monopoli?
What is monopoli?

A monopoly is a single supplier to a market

This firm may choose to produce at any point on the market demand
curve

The reason a monopoly exists is that other firms find it unprofitable or

impossible to enter the market

Barriers to entry are the source of all monopoly power

there are two general types of barriers to entry
technical barriers
legal barriers
4
Technical Barriers to Entry
The production of a good may exhibit decreasing marginal
and average costs over a wide range of output levels
in this situation, relatively large-scale firms are low-cost
producers
firms may find it profitable to drive others out of the industry
by cutting prices
this situation is known as natural monopoly
once the monopoly is established, entry of new firms will be
difficult
5
Technical Barriers to Entry
Another technical basis of monopoly is special
knowledge of a low-cost productive technique
it may be difficult to keep this knowledge out of the
hands of other firms
Ownership of unique resources may also be a
lasting basis for maintaining a monopoly

6
Legal Barriers to Entry

Many pure monopolies are created as a matter of

law with a patent, the basic technology for a
product is assigned to one firm
the government may also award a firm an exclusive
franchise to serve a market

7
Creation of Barriers to Entry

Some barriers to entry result from actions taken by

the firm research and development of new products
or technologies purchase of unique resources
lobbying efforts to gain monopoly power
The attempt by a monopolist to erect barriers to
entry may involve real resource costs

8
Profit Maximization
Profit Maximization

To maximize profits, a monopolist will choose to

produce that output level for which marginal
revenue is equal to marginal cost marginal revenue
is less than price because the monopolist faces a
downward-sloping demand curve he must lower its
price on all units to be sold if it is to generate the
extra demand for this unit
10
Profit Maximization

Since MR = MC at the profit-maximizing output and

P > MR for a monopolist, the monopolist will set a
price greater than marginal cost.

11
 Profit Maximization
Price MC The monopolist will maximize
profits where MR = MC

AC
P* The firm will charge a price
of P*
C

Profits can be found in

the shaded rectangle
D
MR
Quantity 12
Q*
The Inverse Elasticity Rule
The gap between a firm’s price and its marginal cost is
inversely related to the price elasticity of demand
facing the firm
P  MC 1

P eQ, P
where eQ,P is the elasticity of demand for the entire
market
13
The Inverse Elasticity Rule

Two general conclusions about monopoly pricing

can be drawn:
a monopoly will choose to operate only in regions
where the market demand curve is elastic
eQ,P < -1
the firm’s “markup” over marginal cost depends
inversely on the elasticity of market demand
14
Monopoly Profit
Monopoly profits will be positive as long as P > AC
Monopoly profits can continue into the long run because
entry is not possible some economists refer to the profits
that a monopoly earns in the long run as monopoly rents the
return to the factor that forms the basis of the monopoly

The size of monopoly profits in the long run will depend on

the relationship between average costs and market demand
for the product

15
Price Price
MC MC
AC

AC
P* P*=AC

D D
MR MR

Q* Quantity Q* Quantity
Positive profits Zero profit 16
No Monopoly Supply Curve
With a fixed market demand curve, the supply “curve” for a
monopolist will only be one point
the price-output combination where MR = MC
If the demand curve shifts, the marginal revenue curve shifts
and a new profit-maximizing output will be chosen

17
Monopoly with linear demand

Suppose that the market for frisbees has a linear demand

curve of the form
Q = 2,000 - 20P
or
P = 100 - Q/20
The total costs of the frisbee producer are given by

C(Q) = 0.05Q2 + 10,000

18
Monopoly with linear demand

To maximize profits, the monopolist chooses the output for

which MR = MC

We need to find total revenue

TR = PQ = 100Q - Q2/20
Therefore, marginal revenue is
MR = 100 - Q/10
while marginal cost is
MC = 0.01Q
19
Monopoly with linear demand

Thus, MR = MC where
100 - Q/10 = 0.01Q
Q* = 500 P* = 75

At the profit-maximizing output,

C(Q) = 0.05(500)2 + 10,000 = 22,500

AC = 22,500/500 = 45
 = (P* - AC)Q = (75 - 45)500 = 15,000
20
Monopoly with linear demand

To maximize profits, the monopolist chooses the output for

which MR = MC

We need to find total revenue

TR = PQ = 100Q - Q2/20
Therefore, marginal revenue is
MR = 100 - Q/10
while marginal cost is
MC = 0.01Q
21
Monopoly with linear demand

To see that the inverse elasticity rule holds, we can

calculate the elasticity of demand at the monopoly’s
profit-maximizing level of output

Q P  75 
eQ,P    20   3
P Q  500 

22
Monopoly with linear demand

The inverse elasticity rule specifies that

P  MC 1 1
 
P eQ,P 3

Since P* = 75 and MC = 50, this relationship

holds

23
Monopoly and Resource Allocation
Monopoly and Resource Allocation

To evaluate the allocational effect of a monopoly,

we will use a perfectly competitive, constant-cost
industry as a basis of comparison
the industry’s long-run supply curve is infinitely
elastic with a price equal to both marginal and
average cost

25
 Monopoly and Resource Allocation
Price
If this market was competitive, output would
be Q* and price would be P*

Under a monopoly, output would be Q**

P**
and price would rise to P**

P* MC=AC

D
MR

Q** Q* Quantity 26
 Monopoly and Resource Allocation
Price Consumer surplus would fall

Producer surplus will rise

P** Consumer surplus falls by more
than producer surplus rises.
P* MC=AC
There is a deadweight
loss from monopoly
D
MR

Q** Q* 27
Quantity
Welfare Losses and Elasticity

Assume that the constant marginal (and average)

costs for a monopolist are given by c and that the
compensated demand curve has a constant
elasticity:
Q = Pe
where e is the price elasticity of demand (e < -1)

28
Welfare Losses and Elasticity
The competitive price in this market will be
Pc = c

and the monopoly price is given by

c
Pm 
1
1
e
29
Welfare Losses and Elasticity

The consumer surplus associated with any

price (P0) can be computed as

 
CS   Q(P )dP   P e dP
P0 P0


P e 1
P0e 1
CS  
e 1P e 1 30
0
Welfare Losses and Elasticity

c e 1
Therefore, under perfect competition CSc  
e 1

e 1
 
 c 
and under monopoly  
 1 1 
 
CSm    e
e 1 31
Welfare Losses and Elasticity
Taking the ratio of these two surplus measures yields
e 1
 
CSm  1 
 
CSc  1  1 
 
 e
If e = -2, this ratio is ½
– consumer surplus under monopoly is half
what it is under perfect competition 32
Welfare Losses and Elasticity
● Monopoly profits are given by

 
 c 
m  PmQm  cQm    c Qm
 1 1 
 
 e 
e e 1
 c     
    c   c  1
m   e        
 1 1   1 1   1 1  e
     
 e  e  e 33
Welfare Losses and Elasticity
● To find the transfer from consumer surplus into monopoly profits we can
divide monopoly profits by the competitive consumer surplus

e 1
 
 m  e  1  1 
e
 e 
    
CS c  e  1  1 
  1 e 
 e

• If e = -2, this ratio is ¼ 34

Monopoly and Product quality
Monopoly and Product quality

The market power enjoyed by a monopoly may be

exercised along dimensions other than the market
price of its product
type, quality, or diversity of goods
Whether a monopoly will produce a higher-quality
or lower-quality good than would be produced
under competition depends on demand and the
firm’s costs
36
Monopoly and Product quality

Suppose that consumers’ willingness to pay for

quality (X) is given by the inverse demand function
P(Q,X) where
P/Q < 0 and P/X > 0
If costs are given by C(Q,X), the monopoly will
choose Q and X to maximize
 = P(Q,X)Q - C(Q,X)

37
Monopoly and Product quality
● First-order conditions for a maximum are
 P
 P (Q, X )  Q  CQ  0
Q Q
MR = MC for output decisions
 P
Q  CX  0
X X
Marginal revenue from increasing quality by one unit is
equal to the marginal cost of making such an increase 38
Monopoly and Product quality
● The level of product quality that will be opted for under
competitive conditions is the one that maximizes net
social welfare
Q*
SW  0
P (Q, X )dQ  C (Q, X )

• Maximizing with respect to X yields

SW Q*

X
 
0
PX (Q, X )dQ  C X  0
39
Monopoly and Product quality

The difference between the quality choice of a

competitive industry and the monopolist is:
the monopolist looks at the marginal valuation of
one more unit of quality assuming that Q is at its
profit-maximizing level the competitve industry
looks at the marginal value of quality averaged
across all output levels

40
Monopoly and Product quality

Even if a monopoly and a perfectly competitive

industry chose the same output level, they might
opt for diffferent quality levels
each is concerned with a different margin in its
decision making

41
Price Discrimination
Price Discrimination

A monopoly engages in price discrimination if it is able to

sell otherwise identical units of output at different prices
Whether a price discrimination strategy is feasible depends
on the inability of buyers to practice arbitrage
profit-seeking middlemen will destroy any discriminatory
pricing scheme if possible
price discrimination becomes possible if resale is costly

43
Price Discrimination

If each buyer can be separately identified by the

monopolist, it may be possible to charge each
buyer the maximum price he would be willing to pay
for the good
perfect or first-degree price discrimination
extracts all consumer surplus
no deadweight loss

44
 Under perfect price discrimination, the monopolist
Price charges a different price to each buyer
The first buyer pays P1 for Q1 units
P1
P2 The second buyer pays P2 for Q2-Q1 units

MC
The monopolist will
continue this way until the
marginal buyer is no
D longer willing to pay the
good’s marginal cost
45
Quantity
Q1 Q2
Perfect Price Discrimination

Recall the example of the frisbee manufacturer

If this monopolist wishes to practice perfect price
discrimination, he will want to produce the quantity
for which the marginal buyer pays a price exactly
equal to the marginal cost

46
Perfect Price Discrimination
● Therefore,
P = 100 - Q/20 = MC = 0.1Q
Q* = 666
● Total revenue and total costs will be
666
2
Q* Q
R 
0
P (Q )dQ  100Q 
40
 55,511
0

c (Q )  0 .05Q 2  10,000  32,178

• Profit is much larger (23,333 > 15,000) 47

Market Seperation
Perfect price discrimination requires the monopolist
to know the demand function for each potential
buyer
A less stringent requirement would be to assume
that the monopoly can separate its buyers into a
few identifiable markets
can follow a different pricing policy in each market
third-degree price discrimination
48
Market Seperation
● All the monopolist needs to know in this case is the
price elasticities of demand for each market

○ set price according to the inverse elasticity rule

● If the marginal cost is the same in all markets,

1 1
Pi (1  )  Pj (1  )
ei ej

49
Market Seperation
● This implies that
1
(1  )
Pi ej

Pj (1  1 )
ei
• The profit-maximizing price will be higher in markets
where demand is less elastic

50
 If two markets are separate, maximum profits occur by
setting different prices in the two markets
Price
The market with the less
P1 elastic demand will be
charged the higher price
P2

MC MC

D D
MR MR

Quantity in Market 1 Q1* 0 Q2* Quantity in Market 2 51

Third-Degree Price Discrimination

● Suppose that the demand curves in two separated markets are given
by
Q1 = 24 – P1
Q2 = 24 – 2P2
● Suppose that MC = 6
● Profit maximization requires that
MR1 = 24 – 2Q1 = 6 = MR2 = 12 – Q2
52
Third-Degree Price Discrimination

● Optimal choices and prices are

Q1 = 9 P1 = 15
Q2 = 6 P2 = 9
● Profits for the monopoly are
 = (P1 - 6)Q1 + (P2 - 6)Q2 = 81 + 18 = 99

53
 Third-Degree Price Discrimination

● The allocational impact of this policy can be evaluated by

calculating the deadweight losses in the two markets

○ the competitive output would be 18 in market 1 and 12

in market 2

DW1 = 0.5(P1-MC)(18-Q1) = 0.5(15-6)(18-9) = 40.5

DW2 = 0.5(P2-MC)(12-Q2) = 0.5(9-6)(12-6) = 9
54
 Two-Part Tariffs
● A linear two-part tariff occurs when buyers must pay a
fixed fee for the right to consume a good and a uniform
price for each unit consumed
T(q) = a + pq
● The monopolist’s goal is to choose a and p to maximize
profits, given the demand for the product

55
 Two-Part Tariffs
● Because the average price paid by any demander is

p’ = T/q = a/q + p

this tariff is only feasible if those who pay low average

prices (those for whom q is large) cannot resell the good to
those who must pay high average prices (those for whom
q is small)

56
 Two-Part Tariffs
● One feasible approach for profit maximization would be for
the firm to set p = MC and then set a equal to the
consumer surplus of the least eager buyer

○ this might not be the most profitable approach

○ in general, optimal pricing schedules will depend on a

variety of contingencies

57
 Two-Part Tariffs
● Suppose there are two different buyers with the demand
functions
q1 = 24 - p1
q2 = 24 - 2p2

● If MC = 6, one way for the monopolist to implement a two-

part tariff would be to set p1 = p2 = MC = 6

q1 = 18 q2 = 12

58
 Two-Part Tariffs
● With this marginal price, demander 2 obtains consumer
surplus of 36

○ this would be the maximum entry fee that can be

charged without causing this buyer to leave the market

● This means that the two-part tariff in this case would be

T(q) = 36 + 6q
59
Regulation of Monopoly
 Regulation of monopoly
● Natural monopolies such as the utility, communications, and
transportation industries are highly regulated in many countries
● Many economists believe that it is important for the prices of
regulated monopolies to reflect marginal costs of production
accurately
● An enforced policy of marginal cost pricing will cause a natural
monopoly to operate at a loss

○ natural monopolies exhibit declining average costs over a

wide range of output
61
 Because natural monopolies exhibit
Price decreasing costs, MC falls below AC
An unregulated monopoly will
maximize profit at Q1 and P1
If regulators force the
P1
monopoly to charge a
C1 price of P2, the firm will
suffer a loss because
C2
AC
P2 < C2
P2 MR MC
Quantity 62
Q1 Q2 D
 Suppose that the regulatory commission allows the
Price monopoly to charge a price of P1 to some users

Other users are offered the lower price

of P2
P1
The profits on the sales to high-
price customers are enough to
C1
cover the losses on the sales to
low-price customers
C2
AC
P2 MC
Quantity 63
Q1 Q2 D
 Regulation of monopoly

● Another approach followed in many regulatory situations is to

allow the monopoly to charge a price above marginal cost that
is sufficient to earn a “fair” rate of return on investment

○ if this rate of return is greater than that which would occur in

a competitive market, there is an incentive to use relatively
more capital than would truly minimize costs

64
Regulation of monopoly

● Suppose that a regulated utility has a production

function of the form
q = f (k,l)
● The firm’s actual rate of return on capital is defined
as

pf ( k , l )  w l
s
k
65
Regulation of monopoly

● Suppose that s is constrained by regulation to be

equal to s0, then the firm’s problem is to maximize
profits
 = pf (k,l) – wl – vk

subject to this constraint

● The Lagrangian for this problem is
L = pf (k,l) – wl – vk + [wl + s0k – pf (k,l)]

66
Regulation of monopoly

● If =0, regulation is ineffective and the monopoly

behaves like any profit-maximizing firm
● If =1, the Lagrangian reduces to

L = (s0 – v)k

which (assuming s0>v), will mean that the monopoly

will hire infinite amounts of capital – an implausible
result
67
 Regulation of monopoly
Therefore, 0<<1 and the first-order conditions for a
maximum are:

L
 pfl  w  (w  pfl )  0
l
L
 pfk  v  (s0  pfk )  0
k
L
 w l  s0  pf ( k , l )  0
 68
 Regulation of monopoly
● Because s0>v and <1, this means that
pfk < v
● The firm will hire more capital than it would under unregulated
conditions

○ it will also achieve a lower marginal productivity of capital

69
Dynamic Views of Monopoly
 Dynamic Views of Monopoly
● Some economists have stressed the beneficial role that
monopoly profits can play in the process of economic
development

○ these profits provide funds that can be invested in

research and development

○ the possibility of attaining or maintaining a monopoly

position provides an incentive to keep one step ahead
of potential competitors
71
PR dan tugas
No 1.

Sebuah perusahaan monopoli memiliki fungsi biaya 𝑇𝐶 = 2𝑄3 − 15𝑄2 +

60𝑄. Diketahui permintaan pasar adalah 𝑄𝑑 = 50 − 𝑃.
a. Tentukan fungsi penawaran dan harga jual barang.
b. Tentukan laba maksimum perusahaan.
c. Gunakan grafik, tunjukkan keuntungan maksimum dan keuntungan per
unit perusahaan.
d. Tunjukkan menggunakan grafik kerugian perekonomian akibat adanya
monopoli.
e. Jika perusahaan melakukan diskriminasi harga, menggunakan grafik
tunjukkan bagaimana keuntungan perusahaan dapat meningkat.
f. Tentukan berapa harga masing masing jika perusahaan melakukan
diskriminasi harga (P1 dan P2). Harga pertama adalah harga monopoli
dan harga kedua adalah harga persaingan sempurna.
No. 2
Sebuah perusahaan monopoli memiliki fungsi biaya 𝑇𝐶 = 2𝑄3 − 15𝑄2 + 60𝑄.
Diketahui permintaan pasar adalah 𝑄𝑑 = 50 − 𝑃.
a. Tentukan fungsi penawaran dan harga jual barang.
b. Tentukan laba maksimum perusahaan.
c. Gunakan grafik, tunjukkan keuntungan maksimum dan keuntungan per unit
perusahaan.
d. Tunjukkan menggunakan grafik kerugian perekonomian akibat adanya monopoli.
e. Jika perusahaan melakukan diskriminasi harga, menggunakan grafik tunjukkan
bagaimana keuntungan perusahaan dapat meningkat.
f. Tentukan berapa harga masing masing jika perusahaan melakukan diskriminasi
harga (P1 dan P2). Harga pertama adalah harga monopoli dan harga kedua adalah
harga persaingan sempurna.
No. 2..lanjutan

Nicholson (2010): 380

No. 3
Sebuah perusahaan monopoli memiliki fungsi biaya 𝑇𝐶 = 2𝑄 3 − 15𝑄 2 + 60𝑄.
Diketahui permintaan pasar adalah 𝑄𝑑 = 50 − 𝑃.
a. Tentukan fungsi penawaran dan harga jual barang.
b. Tentukan laba maksimum perusahaan.
c. Gunakan grafik, tunjukkan keuntungan maksimum dan keuntungan per unit
perusahaan.
d. Tunjukkan menggunakan grafik kerugian perekonomian akibat adanya monopoli.
e. Jika perusahaan melakukan diskriminasi harga, menggunakan grafik tunjukkan
bagaimana keuntungan perusahaan dapat meningkat.
f. Tentukan berapa harga masing masing jika perusahaan melakukan diskriminasi
harga (P1 dan P2). Harga pertama adalah harga monopoli dan harga kedua adalah
harga persaingan sempurna.
No. 3..lanjutan

Nicholson (2010): 389

No. 3
Sebuah perusahaan monopoli memiliki fungsi biaya 𝑇𝐶 = 2𝑄 3 − 15𝑄 2 + 60𝑄.
Diketahui permintaan pasar adalah 𝑄𝑑 = 50 − 𝑃.
a. Tentukan fungsi penawaran dan harga jual barang.
b. Tentukan laba maksimum perusahaan.
c. Gunakan grafik, tunjukkan keuntungan maksimum dan keuntungan per unit
perusahaan.
d. Tunjukkan menggunakan grafik kerugian perekonomian akibat adanya monopoli.
e. Jika perusahaan melakukan diskriminasi harga, menggunakan grafik tunjukkan
bagaimana keuntungan perusahaan dapat meningkat.
f. Tentukan berapa harga masing masing jika perusahaan melakukan diskriminasi
harga (P1 dan P2). Harga pertama adalah harga monopoli dan harga kedua adalah
harga persaingan sempurna.
No. 3..lanjutan

Nicholson (2010): 394

Thank You
Chandra Utama
Fakultas Ekonomi dan Program Studi Ekonomi Pembangunan
chandradst@unpar.ac.id