Notesale: Turn your study into money

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Monopoly
Imperfect competition and monopoly
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There are different degrees of imperfect competition
At one end of the spectrum is monopoly
Monopoly = a market structure with only one firm and no close substitutes
While a competitive firm is a price taker, a monopoly firm is a price maker
The fundamental cause of monopoly is the presence of barriers to entry

Why monopolies arise (barriers to entry sources)
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Ownership of a key resource
The government gives a single firm the exclusive right to produce some
good
Costs of production make a single producer more efficient than a large
number of producers
A firm is able to gain control of other firms in the market and thus grow in size

Government-Created Monopolies
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Governments may restrict entry by giving a single firm the exclusive right to
sell a particular good in certain markets
Patent and copyright laws are two important examples of how government
creates a monopoly to serve the public interest (laws governing patents and
copyrights have benefits and costs)

How monopolies make production and pricing decisions
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The key difference between a competitive firm and a monopoly is the
monopoly's ability to control price
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MONOPOLY

COMPETITIVE FIRM

• Is the sole producer

• Faces a downward-sloping demand
curve
• Is a price maker

• Reduces price to increase sales

• Is one of many producers (how many?)
• Faces a horizontal demand curve

• Is a price taker

• Sells as much or as little at same price

Monopoly’s Revenue

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Marginal Revenue – when a monopoly increases the amount it sells, it has 2
effects on TR; always less than the price of its good
o Output effect – more output sold, higher Q
o Price effect – price falls, lower P

Profit Maximization

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producing the quantity at which MR = MC
Then using the demand curve, you find the price that will make consumers
buy that quantity

Notes on the shape of curves
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Marginal cost curves are generally U-shaped
However, sometimes you may come across graphs that show only the
upward sloping part of marginal cost
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In this case there will be a second point
where MC=MR, which is in the upward sloping part of the MC curve)

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For a competitive firm, price equals marginal cost

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For a monopoly firm, price exceeds marginal cost
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The monopolist will receive
economic profits as long as price is greater than ATC
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From the standpoint of consumers, this high price makes monopoly
undesirable
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Because a monopoly sets its price above marginal cost, it places a wedge
between the consumer’s willingness to pay and the producer’s cost
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o The monopolist produces less than the socially efficient quantity of
output
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Competition legislation covers: acting against cartels and
restrictive business practices, banning pricing strategies
such as fixing and predatory pricing, monitoring and
supervising acquisitions
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Turning some private monopolies into public enterprises
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Rather than regulating a natural monopoly that is run by a
private firm, the government can run it itself
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May do nothing if the market failure is deemed small
compared to the imperfections of public policies



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