MONOPOLY

CHARACTERISTICS  One seller of a good or service  Completely differentiated good  No close substitutes for the good  Barriers to entry  Legal barriers (patents, licenses)  Economies of scale  Control over resources  All are characteristics of an unregulated monopoly

MONOPOLY DEMAND 1.Firm and market are the same 2.Downward sloping demand curve 3.In order to sell MORE a monopolist must lower prices 4.MR is also downward sloping as a result 5.MR will be located below demand 6.Monopolist can charge more than a PC firm but MUST follow the Law of Demand 7.Monopolist always operates in the ELASTIC portion of the demand curve

KEY GRAPH POINTS Always produce where MC = MR Profit maximizing!!!!! Price is set based on demand curve NOT MC or MR Unregulated monopolies can earn positive economic profits if P>ATC

EFFICIENCY Is a monopoly efficient? NO! NO! NO! Monopolies violate both types of efficiency Allocative efficiency: market produces a level of output where MC=MB (MC=D) Productive efficiency: firms produce at lowest possible cost (P=ATC minimum) Hint: Perfectly competitive firms are always efficient!

Produce here for productive efficiency Produce here for allocative efficiency

Monopolies create deadweight loss

MONOPOLY TRICKS

PRICE DISCRIMINATION Selling the same good at different prices to different people To exist: Must have monopoly power Must be able to sort consumers into groups Must be able to prevent RESALE between consumers Examples: Age discounts at theatres Coupons Early order discounts Buying bulk gets cheaper per unit price

To prevent resale: Immediate consumption of item Tied to identity (airlines)

NATURAL MONOPOLIES

NATURAL MONOPOLY Unique situation where 1 single firm is more efficient than having competition Exists because of economies of scale Costs to produce are so high that firms could never earn back if had to compete

REGULATED MONOPOLIES

REGULATION Two types of regulation on monopolies: Both intended to make firms more efficient and benefit consumers Socially optimal : forces monopoly to act like a perfectly competitive firm Must produce where P=MC Creates allocative efficiency Can create losses for monopoly Fair return : P=ATC Courts state firms can not be forced to operate at losses

Fair Return Socially Optimal