MONOPOLY

Monopoly
 A monopoly is the sole seller of its

product.
its product does not have close
substitutes.
 While a competitive firm is a price
taker, a monopoly is a price maker.
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
The fundamental cause of
monopoly is barriers to entry
Why barriers to entry?
Ownership of key resource.
Government franchise: exclusive right to produce
the good.
Costs of production: a single producer is more
efficient than many producers  natural monopoly.
.
Economies of Scale as a Cause of Monopoly:
HIGH fixed costs  ATC turn up only beyond
the extent of the market “Natural Monopoly”
Cost
Average
total
cost
0 Quantity of Output
Demand Curves for Competitive and
Monopoly Firms...
(a) A Competitive Firm’s (b) A Monopolist’s

Demand Curve Demand Curve is the
Price The competitive firm Price downward sloping
takes the market price industry demand curve
Demand
Demand
0 Quantity of 0 Quantity of
Output Output
Monopoly Revenue
 Total Revenue
P x Q = TR
… just like competitive firm.
 Average Revenue
TR/Q = AR = P
… just like competitive firm.
BUT
 Marginal Revenue
TR/Q = MR < P
A Monopoly’s Total, Average, and
Marginal Revenue
Average
Quantity Price Total Revenue Revenue Marginal Revenue
(Q) (P) (TR=PxQ) (AR=TR/Q) (MR=TR / Q )
0 $11.00 $0.00
1 $10.00 $10.00 $10.00 $10.00
2 $9.00 $18.00 $9.00 $8.00
3 $8.00 $24.00 $8.00 $6.00
4 $7.00 $28.00 $7.00 $4.00
5 $6.00 $30.00 $6.00 $2.00
6 $5.00 $30.00 $5.00 $0.00
7 $4.00 $28.00 $4.00 -$2.00
8 $3.00 $24.00 $3.00 -$4.00
Demand and Marginal Revenue Curves

for a Monopoly...
Price
$11
10
9
8
7
6
5
4
3 Demand
2 Marginal (average revenue)
1 revenue
0
-1 1 2 3 4 5 6 7 8 Quantity of Water
-2
-3
-4
A Monopoly’s Marginal Revenue
TR/Q = MR < P
When a monopoly increases the

amount it sells, it has two effects on
total revenue (TR = P x Q).
 The output effect—more output is
sold, so Q is higher  + P x ΔQ.
 The price effect—price falls, so P is
lower  - Q x ΔP.
Profit Maximization of a Monopoly
 Produce quantity where

MR = MC
 Sell at the price where consumers buy
that profit maximizing quantity.
P = AR > MR = MC
Profit-Maximization for a Monopoly...

2. ...and then the demand
Costs and curve shows the price 1. The intersection of
Revenue consistent with this the marginal-revenue
quantity. curve and the marginal-
cost curve determines
B the profit-maximizing
Monopoly quantity...
price
Average total cost

A
Demand
Marginal
cost
Marginal revenue
0 QMAX Quantity
Comparing Monopoly and
Competition
 For a competitive firm, price equals
marginal cost.
P = MR = MC
 For a monopoly firm, price exceeds
marginal cost.
P > MR = MC
P > MC
Inefficiency
The Monopolist’s Profit...

Costs and
Revenue
Marginal cost
Monopoly E B
price
M pro
on f
Average total cost

op it
ol
y
Average
total cost D C
Demand
Marginal revenue
0 QMAX Quantity
The Inefficiency of Monopoly...

Price
Deadweight Marginal cost
loss
Monopoly
price
Marginal
revenue Demand
0 Monopoly Efficient Quantity

quantity quantity
The Inefficiency of Monopoly
The monopolist produces less
than socially efficient output.
The monopolist earns more by
doing less.
Public Policy Toward Monopolies
 Antitrust Laws: Make monopolized

industries more competitive.
 Regulate monopoly prices.
 Run monopolies as public enterprises.
 Do nothing.
Price Discrimination
Price discrimination -- selling the
same good at different prices to
different customers.
In order to price discriminate, the
firm must have some market power.
Welfare Without Price
Discrimination...
Price (a) Monopolist with Single
Price
Consumer
surplus
Monopoly Deadweight
loss
price
Profit
Marginal cost
Marginal Demand
revenue
0 Quantity sold Quantity

Welfare With Price
Discrimination...
Price (b) Monopolist with Perfect Price Discrimination
Profit
Marginal cost
Demand

Examples of Price Discrimination
 Movie tickets
 Airline prices
 Discount coupons
 Financial aid
 Quantity discounts
The Prevalence of Monopoly
 Most firms have some control over
their prices because of differentiated
products.
 Firms with substantial monopoly
power are rare: few goods are truly
unique.
 Monopolists face competition from
other industries.
Summary
 A monopoly is a firm that is the sole

seller in its market.
 It faces a downward-sloping demand
curve for its product.
 A monopoly’s marginal revenue is
always below the price of its good.
Summary
 Like a competitive firm, a monopoly

maximizes profit by producing the
quantity at which marginal cost and
marginal revenue are equal.
 Unlike a competitive firm, its price
exceeds its marginal revenue, so its
price exceeds marginal cost
 INEFFICIENCY
Summary
 A monopolist’s profit-maximizing level

of output is below the level that
maximizes the sum of consumer and
producer surplus
 INEFFICIENCY
Summary
 Monopolists can raise their profits by

charging different prices to different
buyers based on their willingness to
pay.
 Price discrimination can raise
economic welfare and lessen
deadweight losses.
Graphical
Review
Economies of Scale as a Cause of
Monopoly...
Cost
Average
total
cost
0 Quantity of Output
Demand Curves for Competitive and
Monopoly Firms...
(a) A Competitive Firm’s (b) A Monopolist’s
Demand Curve Demand Curve
Price Price
Demand
Demand
0 Quantity of 0 Quantity of
Output Output
Demand and Marginal Revenue Curves

for a Monopoly...
Price
$11
10
9
8
7
6
5
4
3 Demand
2 Marginal (average revenue)
1 revenue
0
-1 1 2 3 4 5 6 7 8 Quantity of Water
-2
-3
-4
Profit-Maximization for a Monopoly...

2. ...and then the demand
Costs and curve shows the price 1. The intersection of
Revenue consistent with this the marginal-revenue
quantity. curve and the marginal-
cost curve determines
B the profit-maximizing
Monopoly quantity...
price
Average total cost

A
Demand
Marginal
cost
Marginal revenue
0 QMAX Quantity
The Monopolist’s Profit...

Costs and
Revenue
Marginal cost
Monopoly E B
price
M pro
on f
Average total cost

op it
ol
y
Average
total cost D C
Demand
Marginal revenue
0 QMAX Quantity
The Market for Drugs...
Costs and
Revenue
Price
during
patent life
Price after Marginal

patent cost
expires Marginal
revenue Demand
0 Monopoly Competitive Quantity

quantity quantity
The Efficient Level of Output...
Price
Marginal cost
Value Cost to
to monopolist
buyers
Value
Cost to to Demand
monopolist buyers (value to buyers)
0 Efficient Quantity
quantity
Value to buyers is greater Value to buyers is less

than cost to seller. than cost to seller.
The Inefficiency of Monopoly...

Price
Deadweight Marginal cost
loss
Monopoly
price
Marginal
revenue Demand
0 Monopoly Efficient Quantity

quantity quantity
Marginal-Cost Pricing for a Natural
Monopoly...
Price
Average
total cost Average total cost
Loss
Regulated
price Marginal cost
Demand
0 Quantity
Welfare Without Price
Discrimination...
Price (a) Monopolist with Single
Price
Consumer
surplus
Monopoly Deadweight
loss
price
Profit
Marginal cost
Marginal Demand
revenue

Welfare With Price
Discrimination...
Price (b) Monopolist with Perfect Price Discrimination
Profit
Marginal cost
Demand


MONOPOLY

Uploaded by

Copyright:

Available Formats

MONOPOLY

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

MONOPOLY

Uploaded by

Copyright:

Available Formats

Monopoly

 A monopoly is the sole seller of its

(a) A Competitive Firm’s (b) A Monopolist’s

Demand and Marginal Revenue Curves

When a monopoly increases the

 Produce quantity where

Profit-Maximization for a Monopoly...

Average total cost

The Monopolist’s Profit...

Average total cost

The Inefficiency of Monopoly...

0 Monopoly Efficient Quantity

 Antitrust Laws: Make monopolized

0 Quantity sold Quantity

0 Quantity sold Quantity

 A monopoly is a firm that is the sole

 Like a competitive firm, a monopoly

 A monopolist’s profit-maximizing level

 Monopolists can raise their profits by

Demand and Marginal Revenue Curves

Profit-Maximization for a Monopoly...

Average total cost

The Monopolist’s Profit...

Average total cost

Price after Marginal

0 Monopoly Competitive Quantity

Value to buyers is greater Value to buyers is less

The Inefficiency of Monopoly...

0 Monopoly Efficient Quantity

0 Quantity sold Quantity

0 Quantity sold Quantity

You might also like