1. Monopoly
Chapter 16

2. What is a monopoly? Market characterized by:
One firm selling good or service with no substitutes
Barriers to entry that prevent competition from new firms

3. Monopoly in the news

4. Barriers to Entry Natural Ownership Legal
One firm can meet demand at a lower ATC than two or more firms
Ownership
One firm controls the natural resources (for example, DeBeers)
Legal
Franchise, license, patent, or copyright

5. Monopolies and Pricing
Single-Price
Price-Discriminating
Sells its products for the same price to all its customers
DeBeers diamonds: if DeBeers tried to price-discriminate, higher-price customers would just buy diamonds from the lower-price ones
Sells different units for different prices not related to cost differences
Examples include pizza (buy 1, get 1 half-off), discounts at theme parks (veterans discount, senior citizen discount, etc.), or airfare prices

6. Price & Marginal Revenue
Let’s examine the case of Cairo, Nebraska:

7. So, Cairo, Nebraska Sucks
Price
QTY TR MR A 20 18 B 1 14 C 16 2 32 10 D 3 42 6 E 12 4 48 F 5 50

8. Monopoly Output and Price Decision
QTY TR MR TC MC
Profit A 20 12
-12 18 5 B 1 17 14 6 C 16 2 32 23 9 10 7 D 3 42 30 E 4 48 40 8 15 F 50 55 -5
Graph D, ATC, MR, and MC

9. Does it look like this?
Economic profit is maximized when MC=MR (sound familiar?)
Economic profit is measured by the blue rectangle
$4 per haircut * 3 haircuts = $12

10. Inefficiency
Intuitively, you should know that monopolies are inefficient compared to perfect competition
Here’s the economic reason why:

11. Price-Discriminating
Pricing Structure
Single-Price
Price-Discriminating

12. Overseeing Monopolies
Regulation: when the government provides rules and laws to prevent the concentration of power in the hands of one monopoly firm
Deregulation: the opposite of that

13. Social Interest Theory
This suggests that monopolies should be regulated by the government
It is in the interest of society to “regulate away” inefficiency and deadweight loss

14. Capture Theory
This idea suggests that regulations end up serving the firms they are supposed to regulate
Lobbyists: firms have firepower; consumers have none

15. Regulatory Issues