1. Monopoly

2. Learning Objectives: What is a Monopoly? What are the sources of Monopoly power? How does a Monopoly choose how much to produce and what price to charge? What effect does a Monopoly have on economic efficiency? How does a government react to a Monopoly?

3. Definition of Monopoly A market for a product or service with only one firm producing and selling that particular product or service Examples of Monopoly: Public utilities (may be local monopolies) BCCI Indian Railways (till 2009) Example: Entering the Aspartame Market

4. Source of Monopoly Power: Barriers to Entry Key input for production under the control of one firm Network externalities in the supply of the product As more people use the product, its usefulness rises Economies of scale giving rise to Natural Monopoly One firm can supply the entire market at lower average total cost than many firms together Government imposed entry barrier Patent & Copyright Public Franchise

5. Monopolist’s Demand Curve and Marginal Revenue Curve Monopolist’s demand curve is downward sloping When a (non price discriminating) Monopolist lowers the price of the product in order to sell more of it: More of the product gets sold, giving extra revenue Total revenue from all the previous units decreases due to lower price being charged for each unit

6. How does a Monopoly choose Price and Output?

7. A Monopolist Maximizing Profit Profit Maximizing Price and Output: P* & Q* Monopolist’s Profit: □ P*Act

8. A Rule of Thumb for Monopoly Pricing

9. Calculating a Monopolist’s Profit Maximizing Price and Output Price (P)Quantity (Q)Total Revenue (P*Q) Total Cost (C) 2000-41- 191 454 1823617505 1735115566 1646413637 1557511718 146849809 1379179010 12896510111

10. Social Costs of Monopoly Power Fall in Consumer Surplus Rise in Producer Surplus Creation of Deadweight Loss, and thus leading to a fall in Economic Efficiency Example: In Prisons, Sky-High Phone Rates and Money Transfer Fees

11. Measuring Monopoly Power

12. Multi-plant Monopoly

13. Government Policy towards Monopoly Antitrust Laws Merger Evaluations Price Regulations Example: Dollar Tree Crowned Victor In Battle For Family Dollar Example: The Death of Google Reader Paves The Way For Real RSS Businesses