Monopoly

1
Chapter 11

• Monopoly

• The price of monopoly is upon every occasion the
  highest which can be got.
• ADAM SMITH

2
Monopoly Defined

• Pure monopoly
• Industry
• One supplier
• Product no close substitutes
• Sources of monopoly
• Barriers to entry
• Cost advantages

3
Monopoly Defined

• Barriers to entry cost advantages
• Legal restrictions
• Patents
• Control of a scarce resource or input
• Deliberately erected entry barriers
• Large sunk costs
• Technical superiority
• Economies of scale

4
Monopoly Defined

• Natural monopoly
• One firm
• Large-scale production
• Produce all output
• Lower average cost

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Figure 1

• Natural monopoly

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The Monopolists Supply Decision

• Monopolist
• Select price OR quantity
• Downward-sloping demand curve
• P AR
• Marginal revenue curve
• Below demand curve
• MR lt AR

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Figure 2

• Profit-maximizing equilibrium for a monopolist

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The Monopolists Supply Decision

• Profit-maximizing monopolist
• Output MR MC
• Price Demand curve
• If P gt AC Profit
• If P lt AC Loss
• Profit TR TC

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Table 1

• A profit-maximizing monopolists price-output
  decision

Revenue Revenue Cost Cost Total Profit
(1) (2) (3) (4) (5) (6) (7)
Q P TR P ? Q MR TC MC TR TC
0 1 2 3 4 5 6 - 140 107 92 80 66 50 0 140 214 276 320 330 300 10 70 120 166 210 253 298 -10 70 94 110 110 77 2
140 74 62 44 10 -30 60 50 46 44 43 45
10
The Monopolists Supply Decision

• Monopoly vs. Perfect competition
• Monopolist
• Profits can persist
• Restrict output to raise price
• Short-run
• Long-run
• Inefficient resource allocation
• Monopoly
• Likely to shift demand
• Likely to shift cost curves

11
Figure 3

• Comparison of a monopoly and a perfectly
  competitive industry

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Anything Good about Monopoly?

• May aid innovation
• Natural monopolies
• Lower costs
• Economies of scale

13
Price Discrimination Under Monopoly

• Price discrimination
• Sell same product
• Different prices
• Different customers
• No differences in cost
• Differences in cost
• Supply different customers
• Charged same price