Chapter 11
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Chapter 11. Monopoly. The price of monopoly is upon every occasion the highest which can be got. ADAM SMITH. Monopoly Defined. Pure monopoly Industry One supplier Product – no close substitutes Sources of monopoly Barriers to entry Cost advantages. Monopoly Defined.

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Chapter 11

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Chapter 11

Chapter 11

Monopoly

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

ADAM SMITH


Monopoly defined

Monopoly Defined

  • Pure monopoly

    • Industry

    • One supplier

    • Product – no close substitutes

  • Sources of monopoly

    • Barriers to entry

    • Cost advantages


Monopoly defined1

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


Monopoly defined2

Monopoly Defined

  • Natural monopoly

    • One firm

      • Large-scale production

      • Produce all output

      • Lower average cost


Figure 1

Figure 1

Natural monopoly

$3.00

2.50

2.00

Average Cost

AC

C

B

A

1

2

2.5

Quantity Supplied


The monopolist s supply decision

The Monopolist’s Supply Decision

  • Monopolist

    • Select price OR quantity

    • Downward-sloping demand curve

      • P = AR

    • Marginal revenue curve

      • Below demand curve

      • MR < AR


Figure 2

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


The monopolist s supply decision1

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


Table 1

Table 1

A profit-maximizing monopolist’s price-output decision


The monopolist s supply decision2

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


Figure 3

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


Anything good about monopoly

Anything Good about Monopoly?

  • May aid innovation

  • Natural monopolies

    • Lower costs

    • Economies of scale


Price discrimination under monopoly

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


Price discrimination under monopoly1

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


Figure 4

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)


Price discrimination under monopoly2

Price Discrimination Under Monopoly

  • Price discrimination

    • Desirable sometimes

      • Post office

      • Discounts (senior, student)

      • Firms – reach economies of scale


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