1. Part 7 Monopoly
Many markets are dominated by a single seller with market power
The economic model of “pure monopoly” deals with an idealized case of a market with only one seller
A monopoly has no competition and requires
- No close substitutes
- Barriers to entry
Barriers to entry can be legal, natural (economies of scale), or created by the monopoly itself (limit pricing, predatory pricing)

2. Natural Monopoly
Natural monopoly arises due to economies of scale over outputs that are large relative to the size of the market $
LAC D Q

3. Monopoly Pricing
As the only firm in the market the monopoly faces the market demand curve
To sell more means lowering the price – Monopoly is constrained by the demand conditions
Single price monopoly – sells all units at the same price
Price discriminating monopolist – sells different units at different prices (must be restrictions on resale)

4. Single Price Monopoly
Faces the market demand curve and can has to sell all units at the same price P
What happens to P x Q
as price is reduced? P P’ P” D Q Q’ Q” Q

5. Revenue Curves for a Single Price Monopolist
MR = ΔTR/ΔQ
E = 1
E <1
D = AR Q MR $ $
TR max
TR (P x Q) Q

6. Price and Output Decision
Monopolist will never produce in the inelastic range of the demand curve (MR is negative)
Monopolist will produce where the difference between TR and TC is the greatest
Monopolist will produce where MC = MR
Profit maximizing condition is MC = MR, but MR < P

7. Price and Output: TC and TR$ TC TR
Max
economic Profit Q Q*

8. Price and Output: MC and MR
ATC
D = AR
Economic
profit MR Q Q*

9. Single Price Monopoly and Competition
Compare single price monopoly equilibrium with perfect competition—assuming similar cost conditions P
Monopoly MC
Comp S curve P” P’ D
Monopoly MR Q” Q’ Q

10. Efficiency Comparison
Perfect Competition P S CS P’ PS D Q Q’ P
Monopoly S CS P” PS
Deadweight loss MR D Q Q”

11. Efficiency Comparison
Monopoly creates allocative inefficiency measured by the deadweight loss. How significant is this?
Monopoly might gain large economies of scale. Are large firms lower cost?
Monopolies capture consumers’ surplus and redistribute income from consumer to the monopoly

12. Price Discrimination
Price discrimination involves selling different units of the good for different prices for reason unconnected with production costs
Based on differences in willingness to pay between units of the good or between different buyer types or groups
Prevent resale between types or groups
Attempt to capture consumers’ surplus
Price discrimination is illegal but rarely prosecuted—only when used for anti-competitive purposes

13. Price Discrimination Market segmentation P Monopoly revenue P’ P” Q Q”

14. Perfect Price Discrimination
Monopoly charges the maximum willingness
to pay for each unit. D curve then becomes
the MR curve. Q’ is the same as the output
under perfect competition. There is no
deadweight loss. P MC PS
D=MR Q’ Q

15. Policy Issues Possible Advantages of monopoly
- Economies of scale and scope
- Incentives to innovate
Policy towards Monopoly
- Breaking up monopolies
- Regulation of monopoly prices
- Public Ownership
- Don’t worry, be happy
Pricing rules for regulating a natural monopoly
- Marginal cost pricing
- Average cost pricing

16. Regulating a natural Monopoly
P & Q are with no regulation.
P’ & Q’ are with MC pricing which
creates a loss. P” & Q” are with
price = ATC P P”
ATC MC P’ D MR Q Q” Q’ Q