1. Monopoly

2. By the end of this Section, you should be able to:
Define monopolies and discuss how they arise.
Define and explain the types of monopolies
Find monopolies profit maximizing output and price
Evaluate the welfare cost of a monopoly
Define and discuss an example of price discrimination.

3. Definition of a Monopoly
A monopolist is the single supplier of a good or service for which there is no close substitute.
The monopolist makes up the entire supply side of the economy.
Compare this to our definition of a competitive firm (infinite firms of perfect subsititutes)

4. 2 Properties of a Monopoly
There exists a barrier for other firms to enter the market.
Natural Monopoly: A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than two or more firms.
Ex. Water distillery.
Exclusive right: A monopoly arises when the government has given the exclusive right to sell some good to one firm
Ex. Patent, Licensing Fee
Ownership of resources: A monopoly arises when the monopolist has sole access to resources without a close substitute.
Ex. Lime Stone

5. 2 Properties of a Monopoly
2. Monopolist is a price searcher.
Price and quantity changes by the monopolist has a big effect on the market.
The monopolist faces the entire industry’s demand.
Monopolist Market Demand and Marginal Revenue
Competitive Market Marginal Revenue
Price
Price MR
Demand MR
Quantity
Quantity
Marginal Revenue is horizontal because price is set by market forces.
Because monopolist sets P and Q, demand and marginal revenue is the industry’s curve.

6. Profit maximizing Q and P for a Monopolist: 2 approaches
1. TR – TC Approach
The Monopolist’s Profit Maximizing P and Q is where Profit = TR – TC is the highest.
2. MR = MC Approach
Note: Monopolist MR is ALWAYS < P
Here’s an example: Suppose a monopolist supplies 3 units of a good at a price of 8 and 4 units of a good at a price of 7.
P1=7, Q1=4 and P2=8, Q2=3
MR = TR = P1*Q1 – P2*Q2 = 28 – 24 = 4
Q Q1 – Q2 1
MR of the 4th unit=4<7=P of selling 4 units

7. Profit maximizing Q and P for a Monopolist
MC = MR for a Monopolist graphically
Price/Cost MC
ATC
Monopolist Profit = TR–TC = (Pm*)Qm*-(ATC at QM*)Qm* = (Pm*-ATC at Qm*)(Qm*)
Pm*
Economic Profit
ATC at Qm*
MC=MR MR
Demand
Qm*
Quantity

8. Social Cost of a Monopoly as compared to a Competitive Market
Price/Costs
Price/Costs
MC=Supply MC
ATC CS
Pm* CS P* MR
DWL
ATC at Qm* PS PS
Demand MR
Demand Q*
Quantity
Qm*
Quantity

9. Price Discrimination
One way a monopolist causes a social cost is by price discrimination. For example: Movie Theatres
Price Discrimination is selling a given product at more than one price, with the price difference being unrelated to differences in cost.
A price discriminating monopolist charges some customers more than others based upon personal preferences of the monopolist.
Required Conditions for a Monopolist to charge different prices
Firm must face a downward sloping demand curve
Firm must be able to separate and identify buyers
Firm must be able to prevent resale of the product
In a competitive market, buyers are charged the same price for a couple of reasons:
Market sets the P
Goods are homogenous between all of the sellers
We assume buyers have full knowledge