Mirco Soffritti

Microeconomics
What you will learn
• What is the significance of monopoly, a type of industry in which only
one producer, a monopolist, operates?
• Which are the main barriers to entry?
• How does a monopolist maximize profits?
• Why does the presence of monopoly typically reduce social welfare and
what tools do policy makers use to address the problem of monopoly?
• What is price discrimination and why is it so prevalent in certain
industries?
The content of Topic 14

The basics Whys does it exist? The monopolistic

What are the basic Why do monopolies exist?
price
elements of a monopoly?

Surplus and antitrust Price

discrimination
01 The basics
Recall:
Number of Firms

Many
firms

One Type of Products

Few
firm firms
Differentiated Standardized
products
products
Monopoly Oligopoly
Monopolistic Perfect
Competition Competition
• Tennis balls
• Tap water
• Crude oil
• Cable TV • Wheat
• Novels • Milk
• Movies
A different look Examples:

Monopoly:
pharmaceutical companies with
drugs under patent.

Oligopoly:
autos, airlines, photographic film,
sodas

Monopolistic competition:
fast food, retail clothing stores,
sports clubs

Perfect competition:
wheat, corn, soybeans, stock market
The price of a taxi licence
What could there be true behind such a significant difference in the price for a
taxi license across some of the world’s capitals?
• Rome = €70,000
• Paris = €125,000
• Berlin = Regulated
• Sidney = €300,000
• New York = €600,000
Monopoly
Monopoly: An industry controlled by a monopolist is known as a monopoly.
Monopoly: a firm that is the only producer of a good with no close
substitutes.
Market power: the ability of a firm to raise
(control/affect/determine) prices.
Typically: A monopolist reduces the quantity
supplied to QM and moves up the demand curve
from point C to point M, raising the price to pM.
02 Why does it exist?
Why do monopolies exist?
How do they get away with this and protect their profit from new firms?
Profits will not persist in the long run unless there is a barrier to entry.
Barriers to entry are essential for monopolies. They generate profit for the
monopolist in the short run and long run. This can take the form of:

• control of natural resources or inputs

• increasing returns to scale: natural monopoly
• technological superiority
• network externality
• government-made barriers, including patents
and copyrights
Pure monopoly
A pure monopoly refers to a market structure where a single firm or entity is the
sole producer or seller of a product or service with no close substitutes. This firm
has significant market power, allowing it to set prices and control the quantity of
goods or services available without facing direct competition.
Hence, in a pure monopoly:
• No Close Substitutes: Consumers have no alternative options for the product or
service, making the monopolist the only producer of the good.
• Barriers to Entry: High barriers (legal, technological, or
financial) prevent other firms from entering the market
and competing.
• Price Maker: The monopolist sets prices above the
competitive level, often leading to greater profit and
restricted output compared to a competitive market.
Barriers 1. Control over inputs
• De Beers (Diamonds): De Beers had a near-monopoly on the global diamond
market for much of the 20th century. They managed to regulate the supply of
diamonds and, consequently, their market price.
• Alcoa (Aluminum): In the early 20th century, the Aluminum Company of America
(Alcoa) controlled almost all of the world's supply of bauxite, the primary raw
material needed for aluminum production
• OPEC (Oil): The Organization of Petroleum Exporting
Countries (OPEC) isn't a single company but rather a
cartel of oil-producing nations. By controlling a significant
portion of the world's oil reserves, OPEC has historically
had substantial influence over global oil prices.
Barriers 2. Natural monopoly
• A natural monopoly exists when increasing returns to scale (economies
of scale) provide a large cost advantage to a single firm.
• A natural monopoly occurs when a single supplier can provide a good or
service at a lower average cost than any potential competitor due to
economies of scale. This typically happens in industries with high fixed
costs and relatively low marginal costs for adding additional customers.
• The most visible natural monopolies in the modern economy are local
utilities—water, gas, and sometimes electricity. As we’ll see, natural
monopolies pose a special challenge to public policy.
 Barriers 2. Natural monopoly

Given the decreasing nature of average costs ATC, a given quantity of output is
produced more cheaply by one large firm than by two or more smaller firms.
Barriers 2. Natural monopoly

1 FIRM 2 FIRMS
Q ATC
Q FC VC TC ATC
0 ---
0 10,000 0 10,000 --- A 1 10,100
1 10,000 100 10,100 10,100 2 5,100

2 10,000 200 10,200 5,100

Q ATC
3 10,000 300 10,300 3,433 0 ---

4 10,000 400 10,400 2,600

B 1 10,100
2 5,100
Barriers 3. Technological superiority
• In the short run, a firm that maintains a consistent technological advantage
over potential competitors can establish itself as a monopolist.
• But technological superiority is typically not a barrier to entry over the longer
term: over time competitors will invest in upgrading their technology to match
that of the technology leader.
• From the 1970s through the 1990s the chip manufacturer Intel was able to
maintain a consistent advantage over potential competitors in both the design
and production of microprocessors, the chips that run computers.
• Intel has found its technological superiority eroded by a
competitor, Advanced Micro Devices (also known as AMD),
which now produces chips approximately as fast and as
powerful as Intel chips.
Barriers 4. Network externalities
• Network externality: the value of a good or service to an individual increases
as more individuals use the same good or service
• When a network externality exists, the firm with the largest network of
customers using its product has an advantage in attracting new customers,
one that may allow it to become a monopolist
Barriers 5. Government-made barriers
A patent gives an inventor a temporary monopoly in the use or sale of an invention
Viagra (Pfitzer): price from €10 in 1998 to €0.8 a pill in 2.017 (patent expired in US)
A copyright gives the creator of a literary or artistic work sole rights to profit from
that work.
Barriers 5. Government-made barriers
Pfizer’s revenue on the sales of Viagra, since launched in 1998

https://www.cbsnews.com/news/viagra-to-go-generic-in-2017-according-to-pfizer-agreement/
Barriers 5. Government-made barriers
Price of Viagra, 2008-2020

https://theconversation.com/end-of-an-era-for-viagra-as-rivals-get-ready-to-raid-market-15190
To practice with significance and existence
A monopolistic firm is a natural monopoly if it has large fixed
costs, which allows it to produce at lower average cost than
can potential competitors.
a) False
b) True
To practice with significance and existence
A monopoly is an industry structure characterized by:
a) barriers to entry and exit.
b) a single buyer and several sellers.
c) a large number of small firms.
d) a product with many close substitutes.
To practice with significance and existence
When a firm finds that its ATC of production decreases as it
increases production, this firm is said to be experiencing:
a) a barrier to entry.
b) economic profit.
c) (increasing) economies of scale.
d) None of the above.
To practice with significance and existence
Control of a scarce resource or input, economies of scale,
technological superiority, and government-set rules and regulations
are forms of:
a) public policy.
b) pricing behavior.
c) market structure.
d) barriers to entry.
To practice with significance and existence
Natural monopolies are NOT likely to include:
a) a diamond-mining company.
b) an electricity company.
c) a gas company.
d) railways.
To practice with significance and existence
To maintain profits in the long run, a monopoly must be protected
by barriers to the entry of other firms into the industry.
a) True
b) False
To practice with significance and existence
Currently, Good Oil Co. is the only local supplier of home oil in Frigidia, Alaska. This
winter residents were shocked that the price of a gallon of heating oil had doubled
and believed they are victims of market power. Explain which of the following
pieces of evidence support that conclusion.
a) There is a national shortage of oil, and Good Oil could procure a limited amount.
b) Recently, Good Oil and other competing oil-supply firms merged into one firm.
c) The cost to Good Oil of purchasing oil from refineries has gone up significantly.
d) Recently, some non-local firms have begun to offer heating oil to Good Oil
regular customers at a price much lower than Good Oil’s.
e) Good Oil has acquired an exclusive government license to draw oil from the only
heating oil pipeline in the state.
 The monopolistic
03 price
Competition vs monopoly
Competitive firms cannot choose price.
While a competitive firm is a price taker, a monopoly firm is a price maker…
Monopolists can set the price, but are constrained by the demand curve!
Marginal revenue
All firms face the same rule:
Profit is maximized at the Q where MR = MC
So what does MR look like? Recall MR = ∆TR/∆Q
• MR is below the demand curve…
• An increase in production by a monopolist has two opposing effects
on revenue:
o A quantity effect: one more unit is sold, increasing total revenue
by the price at which the unit is sold
o A price effect: to sell the next unit, the monopolist must cut the
market price on all units sold; this decreases total revenue
Demand, total revenue & marginal revenue
Demand, total & marginal revenue. Panel (a)
• The marginal revenue curve lies below the demand curve. To see why,
consider point A on the demand curve, where 9 diamonds are sold at $550
each, generating total revenue of $4,950.
• To sell a 10th diamond, the price on all 10 diamonds must be cut to $500, as
shown by point B.
• As a result, total revenue increases by the green area (the quantity effect:
+$500) but decreases by the yellow area (the price effect: –$450).
• So the marginal revenue from the 10th diamond is $50 (the difference
between the green and yellow areas), which is much lower than its price,
$500.
Demand, total & marginal revenue. Panel (b)
• Shows the monopolist’s total revenue curve for diamonds. As
output goes from 0 to 10 diamonds, total revenue increases.
• It reaches its maximum at 10 diamonds—the level at which marginal
revenue is equal to 0—and declines thereafter.
• The quantity effect dominates the price effect when total revenue
is rising; the price effect dominates the quantity effect when total
revenue is falling.
Demand, total revenue, and marginal revenue
Profit maximization consists of two steps:
1. Choosing a quantity: Choose Q where MR = MC
2. Choosing a price: Choose the highest price you can get away with,
which is the highest price consumers will pay for that quantity.
Rule: Once you’ve picked your quantity, follow the
graph to the demand curve, which shows
you how much consumers will pay
Profit maximizing: constant MC
Note: Here the MC curve is simplified to be constant. We will relax this later
Pitfalls: finding the monopoly price
• In order to find the profit-maximizing quantity of output for a
monopolist, you look for the point where the MR curve crosses the MC
curve.
• But this isn’t the price the monopolist will choose. The firm will want to
charge as much as it can.
• Why stop at MR if it can charge up to what the demand curve says people
will pay?
Profit maximizing. Non-constant MC
Note: Here the MC curve is no longer constant but increasing.
In this case, the marginal cost
curve has a “swoosh” shape and the
average total cost curve is U-
shaped. The monopolist maximizes
profit by producing the level of
output at which MR = MC, given by
point A, generating quantity QM. It
finds its monopoly price, PM, from
the point on the demand curve
directly above point A, point B here.
The average total cost of QM is
shown by point C. Profit is given by
the area of the shaded rectangle.
Profit maximizing. Non-constant MC

Economic Profit = TR − TC =
(PM × QM) − (ATCM × QM) =
(PM − ATCM) × QM > 0

As long as the monopoly

has strong barriers to
entry, profit will stay.
Is there a monopoly supply curve?
• You might be tempted to ask about the supply curve of a monopolist.
But this is a meaningless question.
• Monopolists don’t have supply curves — since they control prices there
is no set relationship between price and quantity supplied.
• For monopoly it would be more appropriate Supply point
to talk about a supply point. In the diagram
on right, this would be point B.
To practice with pure monopoly
Fill in the blanks

“A market is a pure monopoly where there is a _____ selle of a _____ producto

and _____ to entry exist. The demand curve faced by a monopoly firm is
identical to the _____ curve for its product. When demand is downward-
sloping, a single-price monopoly must _____price to sell a higher quantity,
which means that price will be _____ than marginal revenue.”
To practice with pure monopoly
When the firm sets its price at the equilibrium level (diagram on the right),
its total cost is meaured by the área:

a) 0SBJ

b) 0IPJ

c) 0PDJ

d) IPDH
To practice with pure monopoly
When the firm sets its price at the equilibrium level (diagram on the right),
its total revenue is meaured by the área:

a) SPDB

b) IPDH

c) 0PDJ

d) 0SBJ
To practice with pure monopoly
When the firm sets its price at the equilibrium level (diagram on the right),
its economic profit is meaured by the área:

a) ISBH

b) 0PDJ

c) SPDB

c) IPDH
To practice with monopolistic revenue
• Skyscraper City has a subway system, for which a one-way fare is $1.50
and Q=6.000 is the number of daily rides at that price. There is pressure
on the mayor to reduce the fare by one-third, to $1.00.
• The mayor is dismayed, thinking that this will mean Skyscraper City is
losing one-third of its revenue from sales of subway tickets.
• The mayor’s economic adviser reminds her that she is
focusing only on the price effect and ignoring the
quantity effect.
• Explain why the mayor’s estimate of a one-third loss
of revenue is likely to be an overestimate.
The actual loss in revenue is less (could it be an
increase in revenue?). Illustrate with a diagram.
To practice with monopolistic profit
The firm represented in the graph below is profit maximizar (short run)

The firm’s optimizing price is $ _____ and quantity is ______.

The firm’s total revenue is $ _____ and total cost is $______.
The firm’s economic profit is $ _____.
To practice with monopolistic profit
The firm represented in the graph below is profit maximizar (short run)

The firm’s optimizing price is $ _____ and quantity is ______.

The firm’s total revenue is $ _____ and total cost is $______.
The firm’s economic profit is $ _____.
To practice with monopolistic profit
The firm represented in the graph below is profit maximizar (short run)

The firm’s optimizing price is $ _____ and quantity is ______.

The firm’s total revenue is $ _____ and total cost is $______.
The firm’s economic profit is $ _____.
To practice with monopolistic profit
In the short run, a monopoly will produce the quantity for which:
a) P > MR.
b) P < MR.
c) P = ATC.
d) None of the above
To practice with monopolistic profit
In the short run, a monopoly will stop producing if:
a) P > MR.
b) P < AVC.
c) P > ATC.
d) P < ATC.
To practice with monopolistic equilibirium
Which statement about monopoly equilibrium and perfectly competitive
equilibrium is INCORRECT?
a) Price is greater than marginal cost in monopoly, and price equals marginal
cost in perfect competition.
b) In the long run, economic profits are driven to zero in both a monopoly and a
perfectly competitive market.
c) Monopoly output will be less than will the output of a comparable perfectly
competitive industry.
d) When a monopoly exists, the consumer surplus from the market is less than
it would be if the same market were perfectly competitive.
To practice with monopolistic equilibirium
Which statement is TRUE?
a) A monopoly firm is a price maker.
b) Monopolies tend to charge lower prices than do perfectly
competitive firms.
c) MR = P if the demand curve is downward sloping.
d) MR = MC is a profit-maximizing rule for firms in
perfect competition only (that is, not for a
monopoly)
To practice with monopolistic equilibirium
The profit-maximizing rule MR = MC is:
a) followed by all types of firms.
b) not followed by a monopoly because it would reduce economic
profit to zero.
c) followed by a monopoly but not by a perfectly competitive firm.
d) followed by a perfectly competitive firm but not by
a monopoly.
04 Surplus and antitrust
Monopoly and consumer surplus
• Monopoly profit comes at consumers’ expense:
• When a monopoly raises prices and lowers Q, consumer surplus falls and
deadweight loss is created.
• To avoid this, government policy attempts to prevent monopoly behavior.
• The government policies used to prevent or eliminate monopolies are known
as antitrust policies.
• We investigate the issue of the loss in consumer surplus caused by
monopoly.
 Consumer surplus and deadweight loss
We assume for simplicity a market where MC =ATC (both horizontal)

Panel (a) depicts a perfectly competitive industry: output is QC, and market price, PC, is equal
to MC. Since price is exactly equal to each producer’s average total cost of production per
unit, there is no profit and no producer surplus. So total surplus is equal to consumer surplus,
the entire shaded area.
 Consumer surplus and deadweight loss
We assume for simplicity a market where MC =ATC (both horizontal)

Panel (b) depicts the industry under monopoly: the monopolist decreases output to QM and
charges PM. Consumer surplus (blue area) has shrunk: a portion of it has been captured as
profit (green area), and a portion of it has been lost to deadweight loss (yellow area), the value
of mutually beneficial transactions that do not occur because of monopoly behavior. As a
result, total surplus falls.
Monopolies in Europe: Google
Currently, the firms imposing the greatest monopolistic pressure in Europe are American:
Google controls over 90% of the European search engine market.
Threat to Consumers: Google's dominance can lead to:
• Higher advertising prices: Since advertisers have few alternatives, they may have
to pay higher rates, which could be passed on to consumers.
• Reduced choice: Google prioritizes its own services over competitors, limiting
consumer choice.
• Data privacy issues: As Google collects vast amounts of user data, the lack of
competition reduces pressure to improve privacy protections.
Fines/Actions: The European Commission has fined Google over
€8 billion in antitrust penalties since 2017 for abusing its dominant
position in areas like Android and online advertising.
Monopolies in Europe: Microsoft
Currently, the firms imposing the greatest monopolistic pressure in Europe are American:
Microsoft: In Europe, Windows runs on over 70% of all desktop computers, and Microsoft
Office has a near 85% market share in office software.
Threat to Consumers:
• Lock-in effect: Due to Microsoft's dominance, users may find it difficult to switch
to alternative operating systems or productivity software due to compatibility
issues.
• Higher prices: With limited competition, Microsoft may have less incentive to
lower prices for its products.
• Stifled innovation: Competitors in software may struggle to innovate if they
cannot gain market share due to Microsoft’s dominance.
•Fines/Actions: Microsoft was fined €1.7 billion by the EU for anti-
competitive practices related to bundling Explorer with Windows.
Monopolies in Europe: Amazon
Currently, the firms imposing the greatest monopolistic pressure in Europe are American:
Amazon controls 30-50% of the European e-commerce market (depending on the
country). In some categories, such as books and electronics, its share is even higher.
Threat to Consumers:
• Predatory pricing: Amazon’s pricing practices can drive out smaller competitors,
reducing long-term competition.
• Supplier pressure: Amazon can impose restrictive terms on suppliers, which may
lead to higher prices for consumers or reduced product diversity.
• Data use: Amazon uses data from third-party sellers on its platform to launch
competing private-label products, which can crowd out small businesses.
Fines/Actions: The European Commission opened an investigation
into Amazon for abusing its dual role as a marketplace and a seller,
particularly regarding its use of seller data.
Breaking up monopolies in Europe
In Europe, antitrust laws aim to prevent monopolies and promote fair competition
within the European Union (EU). These laws are governed by the Treaty on the
Functioning of the European Union (TFEU), particularly under Articles 101 and 102.
• Article 101 TFEU prohibits agreements between companies that restrict
competition. This includes practices like price-fixing or limiting production.
• Article 102 TFEU: This focuses on preventing the abuse of a dominant market
position. A company holding a dominant position in a market cannot use its power
to eliminate competition, such as by setting unfair prices or limiting production.
• Merger Control Regulation: The EU also has strict rules to prevent mergers and
acquisitions that would lead to dominant companies, potentially reducing
competition. Companies must notify the European Commission of mergers.
• State Aid Rules: EU law also controls state aid (subsidies) to ensure that
governments do not favor certain businesses, distorting competition.
The European Commission is the primary enforcer of these laws and has the power
to investigate, fine, and break up companies that violate these rules.
Breaking up monopolies around the world
• De Beers Diamond (a company founded by Cecil Rhodes in 1888) was a
monopoly in the production of diamonds, which extraction was mainly
based in South Africa. In the 1980s and 1990s, new diamond mines were
discovered outside of De Beers' control, particularly in countries like
Australia and Canada, and this caused the De Beers monopoly to break up.
• By 1878 John D. Rockefeller’s Standard Oil controlled almost all U.S. oil
refining. But in 1911 a court order broke the company
into a number of smaller units, including the firms
that later became Exxon and Mobil (and merged in
1999 to become ExxonMobil).
Breaking up natural monopolies
• Natural monopolies are a different story since they are based on
economies of scale and low average costs.
• There’s no guarantee that the “natural monopolistic” firm will voluntarily
pass along its cost savings to consumers.
• What can public policy do about this? Two common answers:
i. Public (government) ownership of firms: publicly owned
companies, however, are often poorly run.
ii. Price regulation: a price ceiling imposed on a monopolist may
create shortages if it is set too low.
Natural monopolies and price ceiling

In panel (a), if the monopolist is allowed to charge PM, it makes a profit, shown by
the light-blue area; consumer surplus is shown by the dark-blue area. If it is
regulated and must charge the lower price PR, output increases from QM to QR the
monopolist profit will decrease, and the consumer surplus will increase.
Natural monopolies and price ceiling

Panel (b) shows what happens when the monopolist is forced to charge a price equal to
average total cost, that is PR*. Output expands to QR*, and consumer surplus is now the
entire blue area. The firm makes zero profit. This is the greatest consumer surplus possible
when the monopolist is allowed to at least break even, making PR* the ‘best’ regulated price.
05 Price discrimination
Intro to price discrimination
• So far we’ve been assuming our firm is a single-price monopolist: it offers its
product to all consumers at the same price.
• Some firms practice price discrimination: they charge different prices to
different consumers for the same good.
• Recall the profit-maximizing rule for firms with monopoly power:
Produce the Q at which MR = MC
• Based on that Q, the monopolist charges as much as the market will bear
(found by the position of the demand curve)
• But what if the monopolist sells to more than one market, each market
characterized by its own demand curve?
• Example: senior citizens and young people, business travelers and leisure
travelers.
Intro to price discrimination
We distinguish between:
• Single-price monopolist, which offers its product to all consumers at the
same price.
• Price-discrimination monopolist, which charges different prices to
different consumers for the same good.
Intro to price discrimination
• Air Sunshine has two types of customers, business travelers willing to pay at
most MWPB = $550 per ticket and students willing to pay at most MWPS = $150
per ticket. There are 2,000 of each kind of customer.
• Air Sunshine has constant marginal cost of
$125 per seat. If Air Sunshine could charge
these two types of customers different
prices, it would maximize its profit by
charging business travelers $550 and
students $150 per ticket. It would capture
all of the consumer surplus as profit.
• Producer surplus is maximum (blue area)
• Consumer surplus is zero.
 Towards perfect price discrimination

• Panel (a): a monopolist that charges two different prices; PS is shown by the blue area.
• Panel (b): a monopolist that charges three different prices; PS is shown by the shaded area. It is
able to capture more of the CS and to increase its profit. That is, by increasing the number of
different prices charged, the monopolist captures more of the CS and makes a larger profit.
 Towards perfect price discrimination

• Panel (c) : it is the case of perfect price discrimination, where a monopolist charges each
consumer his or her willingness to pay; PS is given by the shaded triangle.
• When perfect price discrimination can be employed, a firm will charge each customer a
different price, the maximum price each is willing to pay.
 Towards perfect price discrimination

• Under perfect price discrimination, there is no deadweight loss because all mutually
beneficial transactions are exploited.
• There is zero consumer surplus because the entire surplus is captured by the monopolist
Techniques for price discrimination
Advance purchase restrictions
–Prices are lower for those who purchase well in advance
Volume discounts
–The price is lower if you buy a large quantity
Two-part tariffs
–A customer pays a flat fee upfront and then a
per-unit fee on each item purchased (a Costco
card is a two-part tariff!).
FAQs to clarify
• Finding the monopoly price. you have to go up from the MC = MR point to the
demand curve.
• Is there a monopoly supply curve? Since the monopolist has control over price,
there is no given market price to use to identify a monopoly supply curve. There
is no supply curve for a monopoly.
• Monopoly versus monopolistic. the term monopolistic is used in “monopolistic
competition” to indicate that firms in the industry, of which there are many, try
to convince consumers that they are the only brand with a particular unique
feature.
• How much can a monopoly charge? if the monopoly charges too high a price, it
will have no customers. Therefore, because the firm is the industry, the industry
demand curve is downward sloping.
To practice with price discrimination
Consider a family facing the following demand curve

If the firm is able to price discriminate produces and sell 3 units, it will receive
total revenues equal to:
a) $300 b) 1,500
c) $1,500 d) 1,800
To practice with price discrimination
Consider a family facing the following demand curve

If the firm is not able to price discriminate produces and sell 3 units, it will receive
total revenues equal to:
a) $300 b) 1,500
c) $1,500 d) 1,800
To practice with price discrimination
Price discrimination allows a monopolist to.
a) Charge each customer the same (high) price, even though some customer
are willing to pay more tan others
b) Charge those customers witha greater willingness to pay a higher price,
resulting in higher profit.
c) Charge a price for its producto that esxceeds of producing it
d) Avoid having to make a pricing decision and leave it
to the government regulators
To practice with price discrimination
A newspaper offers students a discount on the regular subscription rate. The total
number of subscriptions is optimal and, at the current prices, the marginal
revenue from the last subscription sold to a student is $8, while the marginal
revenue from the last subscription sold to a regular customer is $12.
In order to maximize profit, the magazine should…
a) offer all customers the same discount received by the students.
b) offer students a lower discount (raise the price to students).
c) offer students a lower discount (raise the price to students).
d) offer students a lower discount (raise the price to students).
To practice with price discrimination
A newspaper offers students a discount on the regular subscription rate. The total
number of subscriptions is optimal and, at the current prices, the marginal
revenue from the last subscription sold to a student is $8, while the marginal
revenue from the last subscription sold to a regular customer is $12.
If the magazine sells one more subscription to a regular customer and one less
subscription to a student:
a) Profit will increase by $4
b) Profit will increase by $12
c) Profit will decrease by $8
d) None of the above
Summary of Topic 14
Introduction to Monopolies
• Monopoly Definition: A monopoly is a market structure where a single
firm (monopolist) is the sole producer of a good or service with no close
substitutes. This firm has significant control over pricing due to the
absence of competition.
• Market Power: The monopolist can raise prices by restricting the
quantity supplied, unlike firms in competitive markets.
Examples: Local utilities (water, electricity).
Summary of Topic 14
Why Monopolies Exist. Key Barriers to Entry:
• Control over Essential Resources: E.g., De Beers controlled global diamond
supply for much of the 20th century.
• Natural Monopoly: Economies of scale allow one firm to supply the entire
market at a lower cost than multiple firms (e.g., public utilities).
• Technological Superiority: A firm that maintains better technology than its
competitors can establish monopoly power (e.g., Intel in microprocessors).
• Network Externalities: A good becomes more valuable as more people use it
(e.g., social media platforms).
• Government-Created Barriers: Patents and copyrights protect firms from
competition (e.g., pharmaceutical patents like Viagra).
Summary of Topic 14
Monopoly Pricing and Profit Maximization
• Price Maker: Unlike firms in perfect competition, a monopolist has the power to
set prices by controlling the supply of goods.
• Profit Maximization:
o A monopolist maximizes profits at MR = MC (Marginal Revenue = Marginal Cost).
o The monopolist sets the price above marginal cost by moving up the demand
curve, resulting in a higher price and lower output compared to competitive
markets.
• Graph Explanation: Marginal revenue lies below the demand curve due to the price
effect (to sell an additional unit, the price must decrease for all units).
Summary of Topic 14
Consumer Surplus, Deadweight Loss, and Antitrust
• Consumer Surplus: Monopolies decrease consumer surplus because they
charge higher prices and produce less than in competitive markets.
• Deadweight Loss: The inefficiency created by monopolistic pricing leads to a
reduction in total welfare. This lost value represents mutually beneficial
transactions that no longer occur because of the monopoly's restricted output.
• Antitrust Policies: Governments use antitrust laws to prevent or reduce
monopoly power, aiming to restore competition and reduce consumer harm.
o Examples: European Commission fines on Google and Microsoft for anti-
competitive behavior.
Summary of Topic 14
• Price Discrimination: Monopolists can increase profits by charging different
prices to different consumers based on their willingness to pay. This allows them
to capture more consumer surplus.
• Types of Price Discrimination:
o First-Degree (Perfect Price Discrimination): Each consumer is charged their
maximum willingness to pay, capturing all consumer surplus.
o Second-Degree: Prices vary based on the quantity purchased (e.g., bulk
discounts).
o Third-Degree: Different groups of consumers are charged different prices (e.g.,
student or senior discounts).
• Example: Airlines charge business travelers more than leisure travelers for the
same seat due to their different willingness to pay.
To practice
The chart below gives price and quantity data for the demand of a good facing a
monopolist. Assume the firm is NOT able to price discriminate, so it must charge
every customer the same price. Complete the blanks by calculating Total Revenue
and Marginal Revenue.
To practice
_____ is the practice of selling _____ product(s) at different prices to different
consumers, without corresponding differences in costs.

a) Monopolizing; similar

b) Price discrimination; the same

c) Price fixing; different

d) Privatizing; the same

To practice
_____ is the practice of selling _____ product(s) at different prices to different
consumers, without corresponding differences in costs.

a) Monopolizing; similar

b) Price discrimination; the same

c) Price fixing; different

d) Privatizing; the same

To practice
• A monopolist that charges each customer a different price based on the
customer's individual willingness to pay is called a single-price monopolist.
a. False
b. True
• To practice price discrimination, the producer must have some control over the
price of the product.
a. False
b. True
• Price discrimination can never occur in perfect competition.
a. True
b. False
To practice
The diagram below shows a profit-maximizing monopolist’s cost and revenue curves;
the firm only incurs fixed costs of production and no variable costs.

The price set by the firm will readable be at top of the segment:
a) 0A c) 0C
b) 0B d) 0D
To practice
Suppose MR = MC = $3 at an output level of 2,000 units.
If a monopolist produces and sells 2,000 units, charging a Price of $6 per unit
and incurring average total cost of $5`per unit, the monopolist Will earn a profit
equal to:

a) $6,000

b) $4,000

c) $2,000

d) $1,000
To practice
For a firm with monopolistsic power that cannot engage in price discrimination:

a) The MR curve lies below the D curve because any price reduction applies
only to the last unt sold.

b) The MR curve lies below the D curve because the firm must lower the
price on all units to sell a higher level of output.

c) The MR curve lies above the D curve because the

monopolistic firm can charge any price it whishes.
d) None of the above
To practice
Consider the monopolistic firm characterized by the following diagram

If this firm follows the profit-maximizing rule, it will produce ____ units of output;
efficiency would require that the firm produces ______ units of output.
a) 800 , 800 b) 640 , 900
b) 800 , 640 c) 640 , 800
To practice
Consider the monopolistic firm characterized by the following diagram

If this firm follows the profit-maximizing rule, it will earn:

a) $9,600 total revenue, but its total cost will be equal to $5,760.
b) $9,600 total revenue, but its total cost will be equal to $9,600.
c) $11,520 total revenue, but its total cost will be equal to $5,760.
d) $11,520 total revenue, but its total cost will be equal to $9,600.
To practice
Consider the monopolistic firm characterized by the following diagram

If this firm follows the profit-maximizing rule, it will earn ____ economic profit.
a) $11,520
b) $12,600
c) $1,920
d) $0
To practice
Consider the monopolistic firm characterized by the following diagram

If this firm follows the profit-maximizing rule, the deadweight loss is approxim. $____.
a) $1,440
b) $720
c) $2,340
d) $1,170
To practice
If the government sets price equal to average total cost for a natural monopoly:

a) the monopolistic firm will experienece losses.

b) economic profit will be equal to zero.

c) price will be equal to marginal cost.

d) None of the above

To practice

To practice price discrimination, the producer must have some control

over the price of the product.
a. False

b. True
To practice
A monopolist who practices price discrimination can increase sales but
can never increase profits above the level that would result from a
single price being set (using the intersection of marginal revenue and
marginal cost).

a) False
b) True