MONOPOLY

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MONOPOLY
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MONOPOLY

• One producer
• Firm Industry

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BARRIERS to ENTRY

• Patents
• Franchises
• Resource ownership
• Purchase
• Lawsuits
• Economies of scale

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BARRIERS to ENTRY

• Patents
• Exclusive ability to produce (20 years)
• Government granted
• Reward for invention

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BARRIERS to ENTRY

• Franchises
• Exclusive right to supply
• Government granted

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BARRIERS to ENTRY

• Ownership of key resource
• Owner doesnt share with others
• Ex. DeBeer diamonds

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BARRIERS to ENTRY

• Acquisition
• Buy out competition
• Lawsuit
• Sue competition

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BARRIERS to ENTY

• Economies of Scale
• Existing firms expand to take advantage
• Newly developing firms dont have resources
• Ex. Auto industry
• Natural Monopoly
• One firm can supply market more cheaply
• Govt. allows and regulates
• Ex. Power industry

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DEMAND CURVE

• Downsloping
• Must lower P to increase Qd
• MR is less than P
• MR curve below D curve

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PROFIT-MAXIMIZATION

• Same rule
• Produce Q where
• MC MR if
• P gt (or ) to AVC
• If
• P gt ATC profits
• P gt AVC loss minimization

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PROFIT-MAXIMIZATION

• Profits
• Average P ATC
• Total Average profits x Q

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MONOPOLY CHARACTERISTICS

• Price maker
• Restricts production to most profitable level
• Does not charge highest Price
• That would be for 1 unit not profitable

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MONOPOLY CHARACTERISTICS

• Long-run Profits expected
• Only producer
• Short-run Losses possible

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MONOPOLIST vs COMPETITOR

• MONOPOLIST
• P gt ATC
• Production inefficiency
• P gt MC
• Allocative inefficiency

• COMPETITOR
• P ATC
• Production efficiency
• P MC
• Allocative efficiency

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MONOPOLISTS POWER

• Price Discrimination
• Different price for same product for different
  customers
• Must be able to separate customers OR
• Service non-transferable

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MONOPOLISTS LIMITATIONS

• Still restricted by D
• Elastic D
• Potential competition
• Research and development by others
• Regulation issues
• Structural based on market share
• Behavioral abuse of power