1. MONOPOLY MONOPOLY Asst. Prof. Dr. Serdar AYAN

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

3. 3 of 26 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.

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

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

6. 6 of 26 Price and Output Decisions in Pure Monopoly Markets Demand in Monopoly Markets  FIGURE 13.2 The Demand Curve Facing a Perfectly Competitive Firm Is Perfectly Elastic Perfectly competitive firms are price-takers; they are small relative to the size of the market and thus cannot influence market price. The implication is that the demand curve facing a perfectly competitive firm is perfectly elastic. If the firm raises its price, it sells nothing and there is no reason for the firm to lower its price if it can sell all it wants at P* = $5.

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

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

9. 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

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

11. TABLE 13.1 Marginal Revenue Facing a Monopolist (1) Quantity (2) Price (3) Total Revenue (4) Marginal Revenue 00- 110$10 29188 38246 47284 56302 65 0 7428-2 8324-4 9218-6 101 -8

12. Monopoly: Equilibrium y = Q P MR Demand

13. Monopoly: Equilibrium y P MC MR Demand

14. Monopoly: Equilibrium y P ATCATC MC MR Demand AR

15. Monopoly: Equilibrium y P ATCATC MC MR Output Decision MC = MR ymym Demand

16. Monopoly: Equilibrium y P ATCATC MC MR Demand P m = the price ymym PmPm

17. Monopoly: Equilibrium y P ATCATC MC MR Demand The shaded area is the excess profit ymym PmPm

18. 18 of 26 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 = P m AQ m 0, TC = CBQ m 0, and profit = P m ABC.