Economics: Principles and Applications, 2e by Robert E. Hall & Marc Lieberman

Chapter 9: Monopoly

What Is a Monopoly? A monopoly firm is the only seller of a good or service with no close substitutes. The market in which the monopoly firm operates is called a monopoly market.

The Sources of Monopoly Economies of ScaleEconomies of Scale Government-Enforced BarriersGovernment-Enforced Barriers Control of Scarce InputsControl of Scarce Inputs

The Sources of Monopoly Natural Monopoly A market in which, due to economies of scale, one firm can operate at lower average cost than can two or more firms.

The Sources of Monopoly Patent A temporary grant of monopoly rights over a new product or scientific discovery. A temporary grant of monopoly rights over a new product or scientific discovery.

The Sources of Monopoly Copyright A grant of exclusive rights to sell a literary, musical, or artistic work. A grant of exclusive rights to sell a literary, musical, or artistic work.

The Sources of Monopoly Government Franchise A government-granted right to be the sole seller of a product or service. A government-granted right to be the sole seller of a product or service.

Monopoly Goals and Constraints Monopoly Price or Output DecisionMonopoly Price or Output Decision Profit and LossProfit and Loss

Monopoly Goals and Constraints A monopolist, like any firm, strives to maximize profit. And, like any firm, it faces constraints. For any level of output it might produce, total cost is determined by (1) its technology of production and (2) the prices it must pay for its inputs. And for any level of output it might produce, the maximum price it can charge is determined by the market demand curve for its product.

Monopoly Goals and Constraints When any firm--including a monopoly--faces a downward-sloping demand curve, marginal revenue is less than the price of output. Therefore, the marginal revenue curve will lie below the demand curve.

Equilibrium in Monopoly Markets Short-Run EquilibriumShort-Run Equilibrium Long-Run EquilibriumLong-Run Equilibrium Why Monopolies Often Earn Zero Economic ProfitWhy Monopolies Often Earn Zero Economic Profit Comparing Monopoly to Perfect CompetitionComparing Monopoly to Perfect Competition

Equilibrium in Monopoly Markets A privately owned monopoly suffering an economic loss in the long run will exit the industry, just as would any other business firm. In the long run, therefore, we should not find privately owned monopolies suffering economic losses.

Equilibrium in Monopoly Markets Rent-Seeking Activity Any costly action a firm undertakes to establish or maintain its monopoly status.

What Happens When Things Change? A monopolist will react to an increase in demand by producing more output, charging a higher price, and earning a larger profit. It will react to a decrease in demand by reducing output, lowering price, and suffering a reduction in profit.

Price Discrimination Requirements for Price DiscriminationRequirements for Price Discrimination Effects of Price DiscriminationEffects of Price Discrimination

Price Discrimination Single-Price Monopoly A monopoly firm that is limited to charging the same price for each unit of output sold. A monopoly firm that is limited to charging the same price for each unit of output sold.

Price Discrimination Charging different prices to different customers for reasons other than differences in cost. Charging different prices to different customers for reasons other than differences in cost.

Price Discrimination Requirements for Price Discrimination There must be a downward-sloping demand curve for the firm’s output.There must be a downward-sloping demand curve for the firm’s output. The firm must be able to prevent low-price customers from reselling to high-price customers.The firm must be able to prevent low-price customers from reselling to high-price customers. The firm must be able to identify consumers willing to pay more.The firm must be able to identify consumers willing to pay more.

Price Discrimination Perfect Price Discrimination Charging each customer the most he or she would be willing to pay for each unit purchased. Charging each customer the most he or she would be willing to pay for each unit purchased.

The Decline of Monopoly