1. Monopoly
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2. Drawing on Chapter 12
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3. Overview Monopoly Setting a Single Price and Output
Definition
Sources
Profit Maximization
Setting a Single Price and Output
The Short Run
Adjustments In The Long Run
Price Discrimination
The Social Perspective
Efficiency Losses
Public Policy Toward Natural Monopoly
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4. What is a Monopoly? Single seller Product with no close substitutes
Monopolist has significant control over the price(s) it charges
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5. Five Sources Of Monopoly
Exclusive control over important inputs
Economies of scale (natural monopoly)
Patents & copyrights
Network economies
Government licenses or franchises
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6. Input Control Minerals Expertise: nuclear reactor vessels
Diamonds: DeBeers cartel and beyond
Rare earths
China: before and after cutoff of exports
Beryllium & Brush Wellman/Materion
Expertise: nuclear reactor vessels
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7. Figure 12.1: Natural Monopoly
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8. Other Sources Patents & copyrights Network economies
Pharmaceuticals
Publishing
Movies
Network economies
Windows & Android?
Government licenses
India’s “License Raj”
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9. Profit-Maximization by Monopolists
Economic profit,  = TR - TC
Maintain the assumption that the firm’s goal is to maximize economic profit
With barriers to entry, evolutionary justification is weaker, but still exists
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10. Figure 12.2: The Total Revenue Curve for a Perfect Competitor
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11. Monopoly Pricing Monopolist faces market demand Monopolist may charge
P varies inversely with Q
Monopolist may charge
One price to all buyers (single price)
Different prices to different buyers (price discriminate) – if possible
Start analysis with single price
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12. Figure 12.3: Demand, Total Revenue, and Elasticity
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13. Figure 12.4: Total Cost, Revenue, and Profit Curves for a Monopolist
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14. Marginal Analysis Profit is maximized at Q where MR = MC
For a perfectly competitive firm, MR = P (given)
For a monopolist, MR depends on Q (chosen)
Knowing the total economic profit for every Q is a demanding information problem. It is mathematically equivalent to find the Q where MR = MC, and more realistic to have enough information to consider small changes.
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15. Figure 12.5: Changes in Total Revenue Resulting from a Price Cut
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16. Figure 12.6: Marginal Revenue and Position on the Demand Curve
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17. Figure 12.7: The Demand Curve and Corresponding Marginal Revenue Curve
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18. Figure 12.8: A Specific Linear Demand Curve and the Corresponding Marginal Revenue Curve
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19. Figure 12.9: The Profit-Maximizing Price and Quantity for a Monopolist
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20. Figure 12.10: The Profit-Maximizing Price and Quantity for Specific Cost and Demand Functions
For the specific simplified case with D of P=100-2Q, FC = 640, and MC = 20, here is the single-price profit-maximizing choice.
Let’s work through another example: D of P=60-4Q, FC = 120, MC = 2Q. (See spreadsheet for table and graph)
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21. Profit-maximizing Monopoly Pricing
The profit-maximizing level of output must lie on the elastic portion of the demand curve.
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22. Profit-maximizing Monopoly Pricing
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23. Profit-maximizing Monopoly Pricing
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