Monopoly

1
Monopoly
2
Monopoly Characteristics

• A firm that is a sole supplier with no close
  substitutes
  
• Why?
• Patents and Invention Incentives
• Licenses and other Entry Restrictions
• Economies of Scale (Natural Monopoly)
• Control of Essential Resources

3
Economies of Scale
Ciost/Unit
Long Run Average Cost
Qty/Period
4
Revenue for the Monopolist

• The Market Demand Curve is also the Firms Demand
  Curve
  
• See Exhibits 2 3 4 5
• Can monopolists charge any price they want as
  they are the only supplier? If they need more
  money they can just raise the price?

5
Shutdown decision for the monopolist

• Same as for perfect competition. So long as a
  monopolist covers part of their fixed cost and
  ALL variable costs they should continue to
  produce in the short run.

6
Monopoly Oddities

• To get more sales, monopolists must lower price.
• When elastic that results in higher total
  revenue
  
• When inelastic- that results in LOWER total
  revenue

7
When Do Monopolists make Money?

• So long as Total Revenue exceeds total cost
• So long as Marginal Revenue exceeds Marginal
  Cost
  
• Being a monopolist does not allow an automatic
  price to be charged and money to be made
  elasticity still applies.

8
Allocation of Resources in Monopoly

• Note that in exhibit 7
• Where MC MR for a perfectly competitive firm,
  the price is lower and the quantity demanded is
  higher.
  
• Where MC MR for a monopolist, Qm is produced at
  price Pm (Less quantity available at a higher
  price.

9
Price Discrimination

• Assumptions so far have assumed that all are
  aware of the price. When different prices can be
  charged to different sets of customers other
  conditions exist. When
• More than one class of consumers exist, they are
  easy to identify, have different elasticities,
  and cannot sell back to each other price
  discrimination can exist.
• See Exhibit 8