1. Chapter 9 Monopoly ECONOMICS: Principles and Applications, 4e
HALL & LIEBERMAN, © 2008 Thomson South-Western

2. Monopoly
Monopoly firm - The only seller of a good or service with no close substitutes
Monopoly market
The market in which the monopoly firm operates
Barriers to entry
Economies of scale
Legal barriers
Network externalities

3. Barriers to Entry Economies of scale
One firm can operate at lower average cost than other firms
Natural monopoly - arises when one firm
can produce for the entire market
at lower cost per unit

4. Figure 1: A Natural MonopolyC
$15
100
Three firms –each produce 100 units
Each operate at C on LRATC curve
Cost per unit = $15
Articles of
Clothing
per Day
Dollars 12 B
150
Two firms- each produce 150 units
Each firm operate at B on LRATC
Cost per unit = $12 (higher)
LRATC A
300 5
One firm – produce 300 units
Operate at A on LRATC curve
Cost per unit=$5

5. Barriers to Entry Legal barriers Protection of intellectual property
Patents - temporary grant of monopoly
Copyrights - grant of exclusive rights to sell a literary, musical, or artistic work
Government franchise
Grant of exclusive rights over a product

6. Barriers to Entry Network Externalities
The added benefits for all users of a good or service that arise because other people are using it too
Joining a large network is more beneficial than joining a small network

7. Monopoly Behavior Goal Economic constraints
Earn highest profit possible
Economic constraints
Cost – to produce any level of output
Input prices
Technology
Given market demand curve
the highest price it can charge

8. Monopoly Price or Output Decision
The output level
And the maximum price it can charge and still sell that output level
The price
And the maximum output the firm can sell at that price
The MR curve lies below the demand curve
Downward-sloping demand curve
MR<P

9. Figure 2: Demand and Marginal Revenue
Figure 2 Demand and Marginal Revenue for Patty’s Pool
Dollars
Demand
$13 MR 10 A 3 9 B 4 C -1

10. The Profit-Maximizing Output Level
To maximize profit
Produce the quantity where MC = MR
MC curve crosses the MR curve from below
Price and output are not independent decisions, but different ways of expressing the same decision

11. The Profit-Maximizing Output Level
Figure 3 Monopoly Price and Output Determination
Number of Subscribers
Monthly Price per Subscriber 40
$60 MC E D
10,000
30,000 MR

12. Monopoly and Market Power
The ability of a seller to raise price without losing all demand for the product being sold
Price setter
A firm with market power that selects its price, rather than accepting the market price as a given

13. Profit and Loss Profit Loss When P > ATC
Total profit = Profit per unit * Q
Profit per Unit = P – ATC
Loss
When P < ATC
Total loss = Loss per unit * Q
Loss per unit = ATC - P

14. Profit and Loss Figure 4 Monopoly Profit and Loss Dollars (a)
Number of Subscribers
(b)
ATC MC
ATC MC
AVC
$50 E E
$40 40 32
Total Loss
Total Profit D D
10,000
10,000 MR MR

15. Equilibrium in Monopoly Markets
Monopoly market – equilibrium
The monopoly is maximizing profit
Short run
Produce where MR=MC
Profit if P>ATC
Loss if P<ATC
If P>AVC – produce
If P<AVC – shut down

16. Equilibrium in Monopoly Markets
Long run
Monopolies may earn economic profit
Monopoly suffering an economic loss - should always exit the industry
If regulated - the government may decide to subsidize it
If privately owned – exit the industry

17. Monopoly vs. Perfect Competition
Economic profit
Reduced to zero by entry of other firms – in perfect competition
Continue indefinitely – in monopoly
For a given technology, monopoly market
Higher price
Lower output
than a perfectly competitive market

18. Monopoly and Perfect Competition
Figure 5 Comparing Monopoly and Perfect Competition
Quantity of Output
Price per Unit
(a) Competitive Market
(b) Competitive Firm
Dollars per Unit
2. and each firm produces 1,000 units, where P = MC. S MC
ATC
3. When monopoly takes over, the old market supply curve . . . E
$10
$10
d=MR
1. In this competitive market of 100 firms, equilibrium price is $10… D
100,000
1,000

19. Monopoly and Perfect Competition
Figure 5 Comparing Monopoly and Perfect Competition
(c) Monopoly
Price per Unit
4. becomes the monopoly's MC curve.
S = MC F
$15
5. The monopoly produces where MR = MC, E 10 MR D
Quantity of Output
100,000
60,000
6. with a higher price and lower market output than under perfect competition.