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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

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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