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Chapter 11

Chapter 11. Monopoly. The price of monopoly is upon every occasion the highest which can be got. ADAM SMITH. Monopoly Defined. Pure monopoly Industry One supplier Product – no close substitutes Sources of monopoly Barriers to entry Cost advantages. Monopoly Defined.

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Chapter 11

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  1. Chapter 11 Monopoly The price of monopoly is upon every occasion the highest which can be got. ADAM SMITH

  2. Monopoly Defined • Pure monopoly • Industry • One supplier • Product – no close substitutes • Sources of monopoly • Barriers to entry • Cost advantages

  3. Monopoly Defined • Barriers to entry & cost advantages • Legal restrictions • Patents • Control of a scarce resource or input • Deliberately erected entry barriers • Large sunk costs • Technical superiority • Economies of scale

  4. Monopoly Defined • Natural monopoly • One firm • Large-scale production • Produce all output • Lower average cost

  5. Figure 1 Natural monopoly $3.00 2.50 2.00 Average Cost AC C B A 1 2 2.5 Quantity Supplied

  6. The Monopolist’s Supply Decision • Monopolist • Select price OR quantity • Downward-sloping demand curve • P = AR • Marginal revenue curve • Below demand curve • MR < AR

  7. Figure 2 Profit-maximizing equilibrium for a monopolist D M P C $9 4 7 Price per Unit D (AR) MR MC AC MC AC 0 150 Quantity

  8. The Monopolist’s Supply Decision • Profit-maximizing monopolist • Output: MR = MC • Price: Demand curve • If P > AC: Profit • If P < AC: Loss • Profit = TR – TC

  9. Table 1 A profit-maximizing monopolist’s price-output decision

  10. The Monopolist’s Supply Decision • Monopoly vs. Perfect competition • Monopolist • Profits can persist • Restrict output to raise price • Short-run • Long-run • Inefficient resource allocation • Monopoly • Likely to shift demand • Likely to shift cost curves

  11. Figure 3 Comparison of a monopoly and a perfectly competitive industry D P M B C $9 7 Price per Unit D (AR) MR MC AC MC AC 300 0 150 Quantity

  12. Anything Good about Monopoly? • May aid innovation • Natural monopolies • Lower costs • Economies of scale

  13. Price Discrimination Under Monopoly • Price discrimination • Sell same product • Different prices • Different customers • No differences in cost • Differences in cost • Supply different customers • Charged same price

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