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