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Monopoly - Characteristics. A firm is considered a monopoly if . . . . . . it is the sole seller of its product. . . . its product does not have close substitutes. . . . it has some ability to influence the market price of its product. Why Monopolies Arise.

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monopoly characteristics
Monopoly - Characteristics
  • A firm is considered a monopoly if . . .

. . . it is the sole seller of its product.

. . . its product does not have close substitutes.

. . . it has some ability to influence the market price of its product.

why monopolies arise
Why Monopolies Arise
  • The fundamental cause of monopoly is barriers to entry.
  • Barriers to entry have three sources:

ä Ownership of key resource

ä Legal barriers by government

ä Large economies of scale

  • Exclusive ownership of an important resource that cannot be readily duplicated is a potential source of monopoly.
government created monopolies
Government-Created Monopolies
  • Patent and copyright laws are a major source of government-created monopolies.
  • Governments also restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets.
natural monopolies
Natural Monopolies
  • An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.
  • Because of economies of scale, the minimum efficient scale of one firm’s plant is so large that only one firm can supply the market efficiently.
monopoly versus perfect competition
Monopoly

ä Is the sole producer

ä Has a downward-sloping demand curve

ä Is a price maker

ä Reduces price to increase sales

Competitive Firm

ä Is one of many producers

ä Has a horizontal demand curve

ä Is a price taker

ä Sells as much or as little at same price

Monopoly versus Perfect Competition
monopoly s revenue
Monopoly’s Revenue
  • Total Revenue

P x Q = TR

  • Average Revenue

TR/Q = AR = P

  • Marginal Revenue

DTR/DQ = MR

NB : - MR does not equal AR

monopoly s marginal revenue
Monopoly’s Marginal Revenue
  • A monopolist’s marginal revenue is always less than the price of its good.

ä The demand curve is downward sloping.

ä When a monopoly drops the price to sell one more unit, the revenue received from previously sold units also decreases.

monopoly s marginal revenue9
Monopoly’s Marginal Revenue
  • When a monopoly increases the amount it sells, it has two effects on total revenue (P x Q).

ä The output effect—more output is sold, so Q is higher.

ä The price effect—price falls, so P is lower.

monopoly s demand and marginal revenue curves

Demand

(average revenue)

Marginal

revenue

Monopoly’s Demand and Marginal Revenue Curves

Price

The marginal revenuecurve lies below its demand curve.

£11

10

9

8

7

6

5

4

3

2

1

0

1

2

3

4

5

6

7

8

Quantity of Water

-1

-2

-3

-4

profit maximization of a monopoly
Profit Maximization of a Monopoly
  • A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost.
  • It then uses the demand curve to find the price that will induce consumers to buy that quantity.
profit maximization of a monopoly12

Costs and

Revenue

Marginal

cost

Profit Maximization of a Monopoly

Average total cost

Demand

Marginal revenue

0

Quantity

profit maximization of a monopoly13

Costs and

Revenue

Marginal

cost

Profit Maximization of a Monopoly

Average total cost

A

Demand

Marginal revenue

0

Quantity

profit maximization of a monopoly14

Costs and

Revenue

1. The intersection of the

marginal-revenue curve

and the marginal-cost

curve determines the

profit-maximizing

quantity...

Marginal

cost

Profit Maximization of a Monopoly

Average total cost

A

Demand

Marginal revenue

0

Quantity

profit maximization of a monopoly15

Costs and

Revenue

1. The intersection of the

marginal-revenue curve

and the marginal-cost

curve determines the

profit-maximizing

quantity...

Marginal

cost

Profit Maximization of a Monopoly

Average total cost

A

Demand

Marginal revenue

0

QMAX

Quantity

profit maximization of a monopoly16

Costs and

2. ...and then the demand

Revenue

1. The intersection of the

curve shows the price

marginal-revenue curve

consistent with this quantity.

and the marginal-cost

curve determines the

profit-maximizing

Monopoly

quantity...

price

Marginal

cost

Profit Maximization of a Monopoly

B

Average total cost

A

Demand

Marginal revenue

0

QMAX

Quantity

comparing monopoly and competition
Comparing Monopoly and Competition
  • For a competitive firm, price equals marginal cost.

P = MR = MC

  • For a monopoly firm, price exceeds marginal cost.

P > MR = MC

calculating monopoly profit
Calculating Monopoly Profit
  • Profit equals total revenue minus total costs.

Profit = TR - TC

Profit = (TR/Q - TC/Q) x Q

Profit = (P - ATC) x Q

the monopolist s profit

Costs and

Revenue

Monopoly

price

The Monopolist’s Profit

Marginal cost

Average total cost

Demand

Marginal revenue

0

QMAX

Quantity

the monopolist s profit20

Costs and

Revenue

Monopoly

price

Average

total cost

The Monopolist’s Profit

Marginal cost

Average total cost

Demand

Marginal revenue

0

QMAX

Quantity

the monopolist s profit21

Costs and

Revenue

Monopoly

price

Monopoly

profit

Average

total cost

The Monopolist’s Profit

Marginal cost

E

B

Average total cost

D

C

Demand

Marginal revenue

0

QMAX

Quantity

the monopolist s profit22
The Monopolist’s Profit
  • The monopolist will receive economic profitsas long as price is greater than average total cost.
the welfare cost of monopoly
The Welfare Cost of Monopoly
  • A monopoly leads to an inefficient allocation of resources and a failure to maximize total economic well-being.
  • The monopolist produces less than the socially efficient quantity of output.
  • Because a monopoly charges a price above marginal cost, consumers who value the good at more than its marginal cost but less than the monopolist’s price won’t buy it.
the welfare cost of monopoly24
The Welfare Cost of Monopoly
  • Monopoly pricing prevents some mutually beneficial trades from taking place.
the deadweight loss
The Deadweight Loss
  • Because a monopoly sets its price above marginal cost, it places a wedge between the consumer’s willingness to pay and the producer’s cost.
  • ä This wedge causes the quantity sold to fall short of the social optimum.
the deadweight loss26

Monopoly

price

Marginal

revenue

The Deadweight Loss

Price

Marginal cost

Demand

0

Monopoly

quantity

Quantity

the deadweight loss27

Monopoly

price

Marginal

revenue

The Deadweight Loss

Price

Marginal cost

Demand

0

Monopoly

quantity

Efficient

quantity

Quantity

the deadweight loss28

Deadweight

loss

Monopoly

price

Marginal

revenue

The Deadweight Loss

Price

Marginal cost

Demand

0

Monopoly

quantity

Efficient

quantity

Quantity

public policy toward monopolies
Public Policy Toward Monopolies
  • Government responds to the problem of monopoly in one of four ways.

ä Making monopolized industries more competitive.

ä Regulating the behaviour of monopolies.

ä Turning some private monopolies into public enterprises.

ä Doing nothing at all.

creating a competitive market and regulation
Creating a Competitive Market and Regulation
  • Government may implement and enforce antitrust laws to make the industry more competitive.
  • Government may regulate the prices that the monopoly charges.

ä The allocation of resources will be efficient if price is set to equal marginal cost.

  • There are two practical problems with marginal-cost pricing.

ä Price may be less than average total cost, and the firm will lose money.

ä It gives the monopolist no incentive to reduce cost.

public ownership
Public Ownership
  • Government can turn the monopolist into a government-run enterprise.
  • Government can do nothing at all if the market failure is deemed small compared to the imperfections of public policies.
price discrimination
Price Discrimination
  • Price discrimination is the practice of selling the same good at different prices to different customers.

ä Not possible in a competitive market.

  • Two important effects of price discrimination:

ä It can increase the monopolist’s profits.

ä It can reduce deadweight loss.

examples of price discrimination
Examples of Price Discrimination
  • Movie tickets
  • Airline tickets
  • Discount coupons
  • Financial aid
  • Quantity discounts
the prevalence of monopoly
The Prevalence of Monopoly
  • How prevalent are the problems of monopolies?

ä Monopolies are common.

ä Most firms have some control over their prices because of differentiated products.

ä Firms with substantial monopoly power are rare.

ä Few goods are truly unique.

conclusion
Conclusion
  • A monopoly is a firm that is the sole seller in its market.
  • It faces a downward-sloping demand curve for its product.
  • Like a competitive firm, a monopoly maximizes profit by producing the quantity at which marginal cost and marginal revenue are equal.
  • Unlike a competitive firm, its price exceeds its marginal revenue, so its price exceeds marginal cost.
conclusion36
Conclusion
  • A monopolist’s profit-maximizing level of output is below the level that maximizes the sum of consumer and producer surplus.
  • A monopoly causes deadweight losses similar to the deadweight losses caused by taxes.
conclusion37
Conclusion
  • Policymakers can try to remedy the inefficiencies of monopolies with antitrust laws, regulation of prices, or by turning the monopoly into a government-run enterprise.
  • If the market failure is small, policymakers may decide to do nothing at all.
conclusion38
Conclusion
  • Monopolists can raise their profits by charging different prices to different buyers based on their willingness to pay.
  • Price discrimination can raise economic welfare and lessen deadweight losses.
slide39

(a) A Competitive Firm’s Demand Curve

(b) A Monopolist’s Demand Curve’

Price

Price

Demand

Demand

0

Quantity of Output

0

Quantity of Output

Figure 15-2

slide40

Price

£11

10

9

8

7

6

5

4

3

Demand

Marginal

(average revenue)

2

revenue

1

0

1

2

3

4

5

6

7

8

Quantity of Water

-1

-2

-3

-4

Figure 15-3

slide41

Costs and

2. ...and then the demand

Revenue

1. The intersection of the

curve shows the price

marginal-revenue curve

consistent with this quantity.

and the marginal-cost

curve determines the

profit-maximizing

B

Monopoly

quantity...

price

Average total cost

A

Demand

Marginal

cost

Marginal revenue

0

Q1

QMAX

Q2

Quantity

Figure 15-4

slide42

Costs and

Revenue

Marginal cost

Monopoly

E

B

price

Monopoly

Average total cost

profit

Average

D

C

total cost

Demand

Marginal revenue

0

QMAX

Quantity

Figure 15-5

slide43

Costs and

Revenue

Price

during

patent life

Price after

Marginal

patent

cost

expires

Demand

Marginal

revenue

0

Monopoly

Competitive

Quantity

quantity

quantity

Figure 15-6

slide44

Price

Marginal cost

Value to

buyers

Cost to

monopolist

Demand

(value to buyers)

Cost to

monopolist

Value to buyers

0

Quantity

Value to buyers

Value to buyers

is greater than

is less than

cost to seller.

cost to seller.

Efficient

quantity

Figure 15-7

slide45

Price

Marginal cost

Deadweight

loss

Monopoly

price

Marginal

revenue

Demand

0

Monopoly

quantity

Efficient

quantity

Quantity

Figure 15-8

slide46

Price

Average

total cost

Average total cost

Loss

Regulated

Marginal cost

price

Demand

0

Quantity

Figure 15-9

slide47

(a) Monopolist with Single Price

(b) Monopolist with Perfect Price Discrimination

Price

Price

Consumer

surplus

Deadweight

Monopoly

loss

price

Profit

Profit

Marginal cost

Marginal cost

Marginal

Demand

Demand

revenue

0

Quantity sold

Quantity

0

Quantity sold

Quantity

Figure 15-10