1. Chapter 25: Monopoly ECON 152 – PRINCIPLES OF MICROECONOMICS
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.

2. Definition of a Monopolist
A single supplier of a good or service for which there is no close substitute

3. Barriers to Entry The source of monopoly
A barrier to entry that allows the firm to make long-run economic profits

4. Barriers to Entry Ownership of resources without close substitutes
If you owned all the oil reserves, who could enter the refining business?
The Aluminum Company of America (ALCOA) at one time owned 90 percent of the world’s bauxite.

5. Barriers to Entry Problems in raising adequate capital
Choose a product that requires a substantial capital investment
Why not enter the microprocessor market and compete with Intel?

6. Barriers to Entry Economies of scale
Low unit costs and prices drive out rivals
The largest firm can produce at the lowest average total cost

7. Barriers to Entry Natural Monopoly
A monopoly that arises from the peculiar production characteristics in an industry
It usually arises when there are large economies of scale

8. The Cost Curves that Might Lead to a Natural Monopoly: The Case of Electricity
LAC
Price per Kilowatt
LMC
Kilowatts of Electricity per Time Period
Figure 25-1

9. Barriers to Entry Legal or governmental restrictions
Licenses, franchises, and certificates of convenience
Is the postal service still a monopoly?
Consider
UPS
FedEx
Fax machines
The Internet

10. Barriers to Entry Legal or governmental restrictions Patents Tariffs
Intellectual property
Tariffs
Taxes on imported goods
Regulation

11. Barriers to Entry Cartels
An association of producers in an industry that agree to set common prices and output quotas to prevent competition

12. The Demand Curve a Monopolist Faces
Recall
In perfectly competitive markets:
All firms combined create the industry supply
Industry supply relative to market demand (D) determines equilibrium price and quantity
The industry faces the market demand
Monopolist’s demand = market demand
Monopolist is the industry

13. Demand Curves for the Perfect Competitor and the Monopolist
Panel (a)
Panel (b) d = D d
Price per Unit
Price per Unit q Q
Demand If Individual Supplier Is in
Demand If Individual Supplier
Perfect Competition
Is the Only Supplier in a
Pure Monopoly
Figure 25-3, Panels (a) and (b)

14. Comparing Perfect Competition and Monopoly
One of many sellers
Perfectly elastic demand (price takers)
Must only produce more to sell more
All units sold for same price (P = MR)
Single Seller
Faces market demand
Must lower price to sell more
MR < P

15. Marginal Revenue: Always Less Than Price
MR = area A –
area B
Demand curve = AR curve D
Area B ( – )
Loss P 1 P 2
Price of Electricity
Area A (+)
Gain Q Q
+ 1
Quantity of Electricity per
Figure 25-4
Time Period

16. Elasticity and Monopoly
A monopoly is a single seller of a well-defined good or service with no close substitutes.
The more imperfect substitutes there are, and the better these substitutes are, the greater the price elasticity of demand of the monopolist’s demand curve

17. Cost and Monopoly Profit Maximization
Price Maker (Searcher)
A firm that must determine the price-output combination that maximizes profit because it faces a downward-sloping demand curve

18. Monopoly Costs, Revenues, and Profits
Figure 25-5, Panel (a)

19. Monopoly Costs, Revenues, and Profits
Panel (b)
Panel (c)
100 TC 10
Losses MC 90 9 80 8 MR D 70 TR 7
Maximum
profit 60 6
Marginal Revenue per Unit ($)
Price, Marginal Costs, and
Total Costs and Total Revenue ($) 50 5
MC = MR 40 4 30 3 20 2
Profit-
maximizing
rate of output
Losses 10 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Output per Time Period
Output per Time Period
Figure 25-5, Panels (b) and (c)

20. Cost and Monopoly Profit Maximization
Why produce where marginal revenue equals marginal cost?
Producing past where MR = MC
Incremental cost > Incremental revenue
Producing less than where MR = MC
Incremental revenue > Incremental cost

21. Maximizing Profits Figure 25-6 MC MR D
Price, Marginal Cost, and Marginal Revenue per Unit Q m P Q 1 B A Q 2 F C
Quantity per Time Period
Figure 25-6

22. Calculating Monopoly Profit18 17 MC 16 15
ATC 14 13 12 11 10
Price, Marginal Revenue, and Cost
per unit ($) 9 8 MR D Q m P 7 6
Monopoly
profit 5 4 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 13
Output per Time Period
Figure 25-7

23. Monopolies: Not Always ProfitableMC
ATC
Losses C 1 Q m D MR
Price, Marginal Revenue, and Cost
per unit P m A
Output per Time Period
Figure 25-8

24. On Making Higher Profits: Price Discrimination & Differentiation
Price Discrimination (Illegal)
Selling a given product at more than one price, with the difference being unrelated to differences in cost
Price Differentiation (Legal)
Establishing different prices for similar products to reflect differences in marginal cost in providing those commodities to different groups of buyers

25. On Making Higher Profits: Price Discrimination
Necessary conditions for price discrimination
The firm must face a downward-sloping demand curve
The firm must be able to separate markets at a reasonable cost
The buyers in the various markets must have different price elasticities of demand
The firm must be able to prevent resale of the product or service

26. The Social Cost of Monopolies
Original Scenario
Start with a perfectly competitive market in long-run equilibrium
MR = MC
Pe = MC (marginal cost pricing)
Zero economic profits

27. The Social Cost of Monopolies
New Scenario: Now, assume the industry is acquired by one firm with no impact on cost.
End with a monopoly in long-run equilibrium
MR = MC
Higher prices since Pe > MC
Lower quantity
Potential positive economic profits

28. The Effects of Monopolizing an Industry
Before and after scenarios:
Panel (a)
Panel (b)
S = ΣMC S
= MC D MR D P m Q Q e E
Price, Marginal Revenue, and
Marginal Cost per Unit
Price per Unit P e MC m
Quantity per Time Period
Quantity per Time Period

29. Chapter 25: Monopoly ECON 152 – PRINCIPLES OF MICROECONOMICS
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.