CH13 : MONOPOLY Asst. Prof. Dr. Serdar AYAN

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CH13 : MONOPOLY Asst. Prof. Dr. Serdar AYAN

Causes of Monopoly Legal restrictions Patents Control of a scarce resources Deliberately-erected entry barriers. - Technical superiority - Economies of scale

Forms of Imperfect Competition and Market Boundaries pure monopoly An industry with a single firm that produces a product for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profits. natural monopoly An industry that realizes such large economies of scale in producing its product that single-firm production of that good or service is most efficient. 3 of 26

Monopoly: Why? Natural monopoly (increasing returns to scale), e.g. utility companies Pure monopoly a patent; e.g. a new drug sole ownership of a resource; e.g. a toll bridge formation of a cartel

Monopoly: Assumptions Many buyers Only one seller i.e. not a price-taker (Homogeneous product ~ no close substitute) Perfect knowledge Restricted entry (and possibly exit)

Monopoly: Features The monopolist’s demand curve is the (downward sloping) market demand curve The monopolist can alter the market price by adjusting its output level.

Monopoly: Market Behaviour p(y) Higher output y causes a lower market price, p(y). D y = Q

Monopoly: Market Behaviour At the profit-maximizing output level, the slopes of the total revenue and total cost curves are equal, i.e. MR = MC

Monopoly: Market Behaviour Suppose that the monopolist seeks to maximize economic profit What output level maximizes profit?

TABLE 13.1 Marginal Revenue Facing a Monopolist (1) Quantity (2) Price (3) Total Revenue (4) Marginal Revenue - 1 10 $10 2 9 18 8 3 24 6 4 7 28 5 30 -2 -4 -6 -8

Monopoly: Equilibrium Demand y = Q MR

Monopoly: Equilibrium MC P y Demand MR

Monopoly: Equilibrium MC P ATC y Demand AR MR

Monopoly: Equilibrium MC Output Decision MC = MR P ATC ym y Demand MR

Monopoly: Equilibrium MC Pm = the price P ATC Pm ym y Demand MR

Monopoly: Equilibrium MC The shaded area is the excess profit P ATC Pm ym y Demand MR

Price and Output Decisions in Pure Monopoly Markets The Monopolist’s Profit-Maximizing Price and Output  FIGURE 13.5 Price and Output Choice for a Profit-Maximizing Monopolist A profit-maximizing monopolist will raise output as long as marginal revenue exceeds marginal cost. Maximum profit is at an output of 4,000 units per period and a price of $4. Above 4,000 units of output, marginal cost is greater than marginal revenue; increasing output beyond 4,000 units would reduce profit. At 4,000 units, TR = PmAQm0, TC = CBQm0, and profit = PmABC. 17 of 26