1. Chapter 15
Monopoly 1

2. Objectives 1.) Learning the source of monopoly
2.) Understand how a monopolist sets price and output to maximize profits
3.) Evaluate the efficiency of monopoly
4.) Learn some of the various public policies toward a monopoly
5.) Understand how and why a monopolist would price discriminate 1

3. MONOPOLY Monopoly is a market structure characterized by One seller
Homogeneous product
Very much control over price(pricemaker)
Very great difficulty in entering or exiting the market .

4. Monopoly
A Pure Monopoly exists when a single firm is the only producer or seller of a product that has no close substitute. 3

5. Why Learn About Monopolies?
It is estimated that about five (5) percent of domestic output is supplied under monopoly conditions
It helps to understand more common market structures such as monopolistic competition and oligopoly. 4

6. Why Monopolies Arise
The fundamental cause of a monopoly is Barriers to Entry. 5

7. Monopoly: Barriers to Entry
Ownership of Key Resource 6

8. Monopoly: Barriers to Entry
Ownership of Key Resource
Legal Barriers By Government 7

9. Monopoly: Barriers to Entry
Ownership of Key Resource
Legal Barriers By Government
Large Economies of Scale 8

10. Barrier: Monopoly Resources
A single owner of an important resource that cannot be readily duplicated, as with some natural resources. 9

11. Government-Created Monopolies
Patent and copyright laws are a major source of government-created monopolies.
Certain new pharmaceutical drugs
Governments also restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets.
Local cable television 10

12. Natural Monopolies
An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.
The minimum efficient scale of one firms plant is so large that only one firm can supply the market efficiently. 11

13. Economies of Scale as a Cause of Monopoly
Cost
Average
total cost
Quantity of Output

14. Quick Quiz!
What are the three reasons that a market might have a monopoly?
Give two examples of monopolies, and explain the reason for each. 12

15. Monopoly Behavior Monopoly verses Competitive Firm
Sole Producer
Downward Sloping Demand Curve
Price Setter
Reduces Price to Increase Sales
Marginal Revenue curve below demand 13

16. Monopoly Behavior Competitive Firm verses Monopoly
One of many
Horizontal Demand Curve
Price Taker
Sells a lot or a little at same price
Marginal Revenue curve is horizontal 14

17. Demand Curves for Competitive and Monopoly Firms...
Quantity of Output
Demand
(a) A Competitive Firm’s
Demand Curve
(b) A Monopolist’s
Price 2

18. Monopoly’s Revenue Total Revenue: Q x P = TR
Average Revenue: TR ÷ Q = AR
Marginal Revenue: TR ÷ Q = MR
A monopolist’s Marginal Revenue is always less than the price of its good, because of the downward sloping demand curve.
The Marginal-Revenue curve lies below its demand curve. 15

19. Monopoly’s Demand Curves
Price
Demand
Quantity 16

20. Monopoly’s Marginal Revenue and Demand Curves
Price
Demand
Marginal
Revenue
Quantity 17

21. 10 9 8 7 6 5 4 Demand 3 Marginal Revenue 2 1 1 2 3 4 5 6 7 8 9 10$P 11 10 9 8 7 6 5 4 3 2 1 Q 1 2 3 4 5 6 7 8 9 10 11
$TR 10 18 24 28 30
$MR
N/A 10 8 6 4 2 -2 -4 -6 -8
-10
Price 10 9 8 7 6 5 4
Demand 3
Marginal
Revenue 2 1 1 2 3 4 5 6 7 8 9 10
Quantity 17

22. Total, Average, and Marginal Revenue for a Competitive Firm
Quality
Price
Total
Revenue
Average
Revenue
Marginal
Revenue Q P
(TR=P*Q)
(AR=TR/Q)
(MR= TR / Q) 1 2 3 4 5 6 7 8
gallon $6 6 $6 12 18 24 30 36 42 48 $6 6 $6 6 12

23. $ elastic portion inelastic portion Marginal Revenue Demand Quantity $
Total
Revenue
along the elastic
portion of the
demand curve,
lower prices and
greater quantities
result in rising
total revenue
along the inelastic
portion of the
demand curve,
lower prices and
greater quantities
result in declining
total revenue
Quantity 17

24. Monopoly’s Marginal Revenue
When a monopoly drops price to sell more product, the additional revenue received from previous amounts sold will decrease.
Two effects on revenue when price is dropped:
The Output Effect
The Price Effect 18

25. Profit Maximization of a Monopoly
The monopolist’s profit-maximizing quantity of output is determined by the intersection of the Marginal-Revenue curve and the Marginal-Cost curve.
Same rule of profit maximization as perfectly competitive firm
MR = MC 19

26. Monopoly’s Profit Maximization
Price D
Quantity MR 20

27. Monopoly’s Profit Maximization
Price
MC = Supply D
Quantity MR 21

28. Monopoly’s Profit Maximization
Price
MC = Supply
MR=MC D
Quantity MR 22

29. Profit Maximization of a Monopoly
In competitive markets, price equals marginal cost. In Monopolized markets, price exceeds marginal cost.
As long as Average Total Cost is below the monopolist’s price, economic profits will be earned. 23

30. Monopoly’s Profit Maximization Price
MC = Supply D
Quantity MR 24

31. Monopoly’s Profit Maximization Price
MC = Supply
Price consistent with profit maximizing quantity PM D
Quantity QM MR 25

32. Profit Maximization of a Monopoly
In competitive markets, price equals marginal cost. In Monopolized markets, price exceeds marginal cost.
As long as Average Total Cost is below the monopolist’s price, economic profits will be earned. 26

33. Monopoly’s Profit Maximization
Price
MC = Supply
Monopoly
Price PM
Monopoly
Quantity D
Quantity QM MR 27

34. Monopoly’s Profit Maximization
Price
MC = Supply PM
Monopoly
Average Cost
Curve D
Quantity QM MR 28

35. Monopoly’s Profit Maximization
Price
MC = Supply PM
Monopoly
Profit! D
Quantity QM MR 29

36. Comparing Monopoly and Competition
For a competitive firm, price equals marginal cost.
P = MR = MC
For a monopoly firm, price exceeds marginal cost.
P > MR = MC 23 31

37. Profit = (TR/Q - TC/Q) x Q Profit = (P - ATC) x Q
A Monopoly’s Profit
Profit equals total revenue minus total costs.
Profit = TR - TC
Profit = (TR/Q - TC/Q) x Q
Profit = (P - ATC) x Q 40 32

38. Quick Quiz!
Explain how a monopolist chooses the quantity of output to produce and the price to charge. 30

39. The Welfare Cost of Monopoly
A monopoly leads to an inefficient allocation of resources, leading to a failure to maximize total economic well-being,
The monopolist produces less than the socially efficient quantity of output. 31

40. The Welfare Cost of Monopoly
At monopoly prices, some potential consumers value the good at more than its marginal cost but less than the monopolist’s price.
These consumers do not end up buying the good.
Monopoly pricing prevents some mutually beneficial trades from taking place. 32

41. The Welfare Cost of Monopoly: Deadweight Loss
Because a monopoly sets price above MC it places a wedge, similar to a tax.
The wedge causes the quantity sold to fall short of the social optimum. 33

42. Monopoly’s Profit Maximization
Price
MC = Supply
Monopoly
Price PM
Monopoly
Quantity D
Quantity QM MR 34

43. Monopoly’s Profit Maximization
Price
MC = Supply PM
Efficient
Quantity! D
Quantity QM MR 35

44. Monopoly’s Profit Maximization
Price
MC = Supply PM D
Quantity QM MR 36

45. Monopoly’s Profit Maximization
Price
MC = Supply PM
Monopoly
Deadweight Loss D
Quantity QM MR 37

46. Monopolistic Deadweight Loss: Example
Cable TV market. Assume:
Competitive Market Price = $15
Monopolist Market Price = $25
Marginal Cost = $5
Deadweight loss to society is $10:
Consumer does not value cable TV at more than its cost. Hence the consumer will not subscribe to cable TV.0 38

47. The Market for Drugs... Marginal cost Marginal revenue Demand
Costs and Revenue
Price during patent life
Price after patent expires
Marginal cost
Marginal revenue
Demand
Monopoly quantity
Competitive quantity
Quantity

48. Public Policy Toward Monopoly: Government may intervene by. . .
Creating a competitive market
Implement/Enforce Anti-Trust Laws
Regulating the behavior of monopolies
Price control and regulation
Public Ownership
Government runs the monopoly itself
Doing Nothing 39

49. Marginal-Cost Pricing for a Natural Monopoly
Price
Average total cost
Loss
Regulated
price
Marginal cost
Demand
Quantity

50. Quick Quiz!
Describe the ways policymakers can respond to the inefficiencies caused by monopolies.
List a potential problem with each of these policy responses. 40

51. Price Discrimination: Monopoly Tool
The practice of selling the same good to different customers at different prices.
Not possible in a competitive market.
Two Important Effects:
Can increase the monopolist’s profits
Can reduce deadweight loss
A Parable About Pricing (Figure 15-10) 41

52. Welfare With and Without Price Discrimination
(a) Monopolist with Single Price
(b) Monopolist with Perfect Price
Discrimination
Price
Price
Consumer Surplus
Profit
Deadweight Loss
Profit
Marginal cost
Marginal cost
Demand
Marginal
Revenue
Demand
Quantity
sold
Quantity
Quantity

53. Examples: Price Discrimination
Movie Tickets, i.e., children, adult, senior Citizens
Airline Tickets, i.e., first class, coach, stay over, one-way verses round-trip
Discount Coupons
Financial Aid
Two-Part Tariff, i.e., amusement park entrance fee, and then a fee for each ride 42

54. The Prevalence of Monopoly
How prevalent are the problems of monopolies?
Monopolies are common.
Most firms have some control over their prices because of differentiated products.
Firms with substantial monopoly power are rare.
Few goods are truly unique. 44 77

55. Quick Quiz! Give two examples of price discrimination.
How does perfect price discrimination affect consumer surplus, producer surplus, and total surplus? 43

56. The Prevalence of Monopoly
How prevalent are the problems of monopolies?
Monopolies are common. Most firms have some control over the prices because of differentiated products.
Ben & Jerry’s Ice Cream vs Breyer’s
Firms with substantial monopoly power are rare. Few goods are truly unique. 44

57. Summary A monopoly is a firm that is the sole seller in its market.
It faces a downward-sloping demand curve for its product.
A monopoly’s marginal revenue is always below the price of its good.

58. Summary
Like a competitive firm, a monopoly maximizes profit by producing the quantity at which marginal cost and marginal revenue are equal.
Unlike a competitive firm, its price exceeds its marginal revenue, so its price exceeds marginal cost.

59. Summary
A monopolist’s profit-maximizing level of output is below the level that maximizes the sum of consumer and producer surplus.
A monopoly causes deadweight losses similar to the deadweight losses caused by taxes.

60. Summary
Policymakers can respond to the inefficiencies of monopoly behavior with antitrust laws, regulation of prices, or by turning the monopoly into a government-run enterprise.
If the market failure is deemed small, policymakers may decide to do nothing at all.

61. Summary
Monopolists can raise their profits by charging different prices to different buyers based on their willingness to pay.
Price discrimination can raise economic welfare and lessen deadweight losses.