Chapter 11

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

5. Figure 1 Natural monopoly $3.00 2.50 2.00 Average Cost AC C B A 1 2 2.5 Quantity Supplied

6. The Monopolist’s Supply Decision • Monopolist • Select price OR quantity • Downward-sloping demand curve • P = AR • Marginal revenue curve • Below demand curve • MR < AR

7. Figure 2 Profit-maximizing equilibrium for a monopolist D M P C $9 4 7 Price per Unit D (AR) MR MC AC MC AC 0 150 Quantity

8. The Monopolist’s Supply Decision • Profit-maximizing monopolist • Output: MR = MC • Price: Demand curve • If P > AC: Profit • If P < AC: Loss • Profit = TR – TC

9. Table 1 A profit-maximizing monopolist’s price-output decision

10. The Monopolist’s 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 D P M B C $9 7 Price per Unit D (AR) MR MC AC MC AC 300 0 150 Quantity

12. 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

14. Price Discrimination Under Monopoly • Price discrimination • Higher profits • Two consumer groups • Different demand curves • Different MR curves • Different prices • Same marginal revenue: MRa = MRb • Maximize profits • MC = MRa = MRb

15. Figure 4 Prices and quantities under price discrimination Customer group B Customer group A Da Db Pa Pb J W Price Price H H MRb MRa Qa Qb Db Da 0 0 Quantity Quantity (b) (a)

16. Price Discrimination Under Monopoly • Price discrimination • Desirable sometimes • Post office • Discounts (senior, student) • Firms – reach economies of scale