Two Distinguishing Features of Monopoly:

1
Two Distinguishing Features of Monopoly - No
close substitutes Compare water to shoe
brands - Barriers to entry Legal barriers
(e.g., U.S. Postal Service) Natural barriers
(e.g., utilities)
2
Natural Monopoly
15
Price (cents per kilowatt-hour)
10
5
ATC
D
0
1
2
3
4
Quantity (millions of kilowatt-hours)
3
A Monopoly has market power - The ability to
raise price by reducing output Monopolists
demand curve is downward sloping ? Marginal
revenue is below price (why?) In order to sell
more, monopolist must reduce price on all units
sold--if not price discriminating--which means P
MR.
4
Demand and Marginal Revenue
20
16
Price marginal revenue (dollars per haircut)
14
10
Demand
2 3
Quantity (haircuts per hour)
5
Monopolists behavior Maximize profit ?
Produce where MR MC Question Will monopolist
ever produce where demand is inelastic?
Why? Profit is determined by the difference
between average cost and price Profit (P -
ATC) Q
6
A Monopolys Output and Price
MC
20
Profit 12 (4 x 3 units)
Price and cost (dollars per hour)
14
10
0 1 2 3 4 5
Quantity (haircuts per hour)
7
Since P MR for a monopolist and given MR
MC P MC Monopoly is inefficient (why?) -
Recall that price measures the willingness of
consumers to pay for one more unit of this
good. - MC measures the cost of providing one
more unit of this good. Thus, P MC implies that
consumers are willing to pay the cost of
producing more of the good, but this production
does not occur--there is a deadweight loss from
reduced output
8
Single Price Monopoly and Competition Compared
Price
PM
QC
Quantity
9
Inefficiency of Monopoly
Perfect Competition
Price
S MC
PC
D
0
Quantity
QC
10
Inefficiency of Monopoly
Monopoly
PA
Price
MC
PM
PC
D
MR
0
QM
QC
Quantity
11
Price Discrimination Monopolist can make more
profit (and reduce deadweight loss) by price
discriminating Requirements for successful price
discrimination 1) Identify and separate
different buyer types 2) Sell a good for which
resale is not possible or can be
prohibited Examples - Quantity discounts -
Student or senior prices
12
A Single Price of Air Travel
2,100
Price (dollars per trip)
1,800
1,500
1,200
900
600
300
D
0
5
8
10
15
20
Trips (thousands per year)
13
New Fair StructurePrice Discrimination
MC
2,100
1,800
ATC
Price (dollars per trip)
1,600
1,400
1,200
900
600
300
D
0
6
8
10
15
20
4
2
Trips (thousands per year)
14
Price Discrimination in Air Travel - Different
travelers have different willingness to pay for
travel - Tickets cannot be used by another
passenger - Airlines sell tickets on same flight
at different prices to different passengers What
are the implications of price discrimination? -
Better for airlines - Better for passengers (?)