MONPOLY

CONDITIONS One Firm High barriers of entry No close substitutes for good the monopoly firm produces.

Barriers to Entry Patents: firm holding a patent on a production process, can exclude other firms from using that process for a number of years. Large start-up costs: If these start-up costs are large enough, most firms will be discouraged from entering the market. Limited access to resources: a monopolistic market structure is likely to arise when access to resources needed for production is limited.

Natural Monopolies Not all monopolies are due to barriers to entry. Few monopolies arise naturally, in markets where there are large economies of scale. i.e. local telephone.

Demand in a Monopolistic Market The demand curve for a monopolist is the market demand curve, which is downward sloping. The price a monopolist can expect to receive for its output will not remain constant as it increases its output.

Demand in a Monopolistic Market Price-searching behavior Declining marginal revenue and price

Price-searching behavior Monopolist does not have to simply take the market price as given. Thus, the monopolist is a price searcher: it searches the demand curve for the profit maximizing price. To achieve this goal: the monopolist compares the MR and MC associated with each possible price –output combination on the market demand curve.

Declining marginal revenue and price MR from each unit sold is not constant: price of each unit sold falls as the monopolist increases output (Law of Demand). Monopolist cannot price discriminate: charge a different price for each unit of output it produces. MR≠P, But MR<P (p is the price that the monopolist can charge for the additional unit)

Relationship MR and Price Market Demand and Monopoly Revenue Out- put PriceTotal Rev MR 0$

Relationship MR & Price Market Demand and Monopoly Revenue MR=P(price of third unit)-(loss TR received from the 1 st two units due to lower price) 2x$8=$16  $20- $16=$4 MR=$8-$4=$4 Out- put PriceTotal Rev MR 0$14$ $

Profit Maximization MR=MC  Monopolist maximizes profits

Profit Maximization Out- put PriceTRMRTC AVTC MC Profits 0$14$0-$2 112 $

Profit Maximization Out- put PriceTRMRTC AVTC MC Profits 0$14$0-$ $126$6$4$

Profit Maximization At what output does a monopolist maximize profit? Monopolist will experience short-run losses whenever AVTC>P Absence of a monopoly supply curve: There is no monopolist’s supply curve. The monopolist’s supply decisions do not depend on MC alone. It depends on both MC and MR received at each price level.

Monopoly in Long-run Due to barriers to entry, it is possible for the monopolist to avoid competition and continue making positive economic profits.

Costs of Monopoly Produces less output and sells it at a higher price. Monopolist’s behavior is costly to the consumers who demand the monopolist’s output. The cost to the consumer is the reduction in consumer surplus. Consumer losses have resulted in legal efforts to break up monopolies and government regulation of natural monopolies.