1 Chapter 11: Monopoly

2 Monopoly Assumptions: Restricted entry One firm produces a distinct product Implications: A monopolist firm is a ‘price setter,’ that is, they can affect the market price and set it to maximize their profits (demand curve slopes downward) –Profit maximizing output occurs where MC=MR (like perfect competition), but price is above MC Economic profits are positive in the long run A monopolist sets price and quantity simultaneously and therefore does not have a true supply curve The monopolist’s profit-maximizing output will not be socially optimal

3 Sources of Monopoly Various sources of barriers to entry, such as: –Exclusive control over natural resources –Economies of scale Natural monopoly has a constantly downward sloping LRATC curve –Patents/trademarks –Network economies –Government licenses or franchises –Product differentiation

4 Monopoly: Numeric Example QPTRMRTCMCATCProfit

5 Monopoly Marginal cost demand Marginal revenue Q* P* Price/Marginal Revenue widgets Inefficiency or deadweight loss Average total cost profits

6 Algebra of Marginal Revenue and Elasticity Marginal Revenue Recall: Price Elasticity of Demand Therefore,

7 Monopolist Profit-Maximizing Markup

8 A monopolist faces the following demand and marginal cost curves What is the profit-maximizing price it will charge? What is the total profit? What is the size of the inefficiency? Algebra of Monopoly Optimums

9 Two-Plant Monopoly Market 1 Market 2Total P2P2 P1P1 Q1Q1 Q2Q2 MC Q 1 + Q 2 MR 1 + MR 2 MC*

10 Total Revenue: Monopoly v. Perfect Competitor Q Q Total Revenue Slope = P* TR = P*Q Perfect CompetitorSingle-Price Monopoly

11 Monopoly v. Perfect Competitor Monopoly Price setter MR is declining and below demand curve Equilibrium price is set above MC Economically inefficient Perfect Competitor Price taker MR is constant Marginal cost pricer Economically efficient