Monopoly

Definition:
A Monopoly firm is a SINGLE SELLER situation, in which
there are NO CLOSE SUBSTITUTE
T.I.N.A.

Features:
1. Single Seller (= single owner)
2. No close substitutes
3. Firm and industry are concurrent (= price maker and price
taker)
4. The Mon. Firm cannot determine both: the Price as well as the
Qty to be sold due to the constraint of the dd function
5. Nature of Edp: if prices are rising then RIE
if prices are falling then RE
6. Objectives: Profit Max; Sales Max; Breakeven ??
 Monopoly: Super-Normal Profit (short-run)
At E: MC = MR < AR > AC
Rev,
Cost

MC AC MC = MR Stable Eqm

R MR < AR Imperfect Comp

P

T
AR > AC Super N.P.
C

MR AR

Q Qty
 Monopoly: Normal Profit (short-run)

Rev,
At E: MC = MR < AR = AC
Cost
MC
MC = MR Stable Eqm
AC

MR < AR Imperfect Comp

R=C
P= T
AR = AC Normal Profit

E
MR AR

Q Qty
 Monopoly: Sub-Normal Profit (short-run)
AC
At E: MC = MR < AR < AC
Rev,
Cost
MC = MR Stable Eqm
MC

T C
MR < AR Imperfect Comp
P R

AR < AC Sub N.P.

E
MR AR

Q Qty
 Monopoly: short-run
Sub-NP AC
R,
R, C
R,
C
Super-NP C Normal Profits
MC AC MC
AC MC

T C

P R R=C
P R
P=T

T C

E E E
MR AR MR AR MR AR

Q Qty Q Qty Q Qty

Monopoly Dynamics
in the Long Run
 Monopoly operations in the Long Run
MC1 AC
Rev, 1
Cost

R1
P1
C1
T1

E1 R2 AC2
P2 MC2

C2
T2

E2

MR AR

Q1 Q2 Qty
Monopoly Dynamics under
Different Cost Conditions
 Decreasing Cost Constant Cost Increasing Cost

Rev, Rev, Rev,

Cost Cost Cost
MC3

R3
P3 AC3

R1 R2
P1 P2

C1 E3
T1
T3 C3
AC1 AC2 / MC2
E1 T2
E2 =C2
AR1
MC1
AR2 AR3
MR3
MR2
MR1

Q1 Q2 Q3
Qty Qty Qty
 Monopoly Power
and
Price Discrimination
First Degree Price Discrimination

Price

cA cB cC cD Consumer Type
 Second Degree Price Discrimination

Price Price

D
D

Qty Qty
Case B
Case A
 Third Degree Price Discrimination at Domestic level
2 conditions for 3rd Degree PD to be profitable:
1. Elasticity differences 2. No Inter-Mkt Movements

Mkt Type1 Mkt Type 2 Common Situation

R,C R,C R,C

OQT = OQ1 + OQ2

R1 MC
R2

E1 E2 Ec
AR2
AR1 CMR
MR1 MR2

Q1 Q2 QT
Qty Qty Qty (10)

Fig. 1 Fig. 2 Fig. 3

 Third Degree Price Discrimination at the Global level
= DUMPING

Domestic Mkt Global Mkt Common Situation

R,C
R,C R,C OQg = OQT - OQd

Rd
MC

Pg ARg / MRg Ec
CMR
Ed
ARd
MRd

Qd Qg QT
Qty Qty Qty
Fig. 1 Fig. 2 Fig. 3
Monopoly and Dead-Weight Loss
 Monopoly and Dead-Weight Loss

Rev & MC
AC
Cost

R
P1
W
T1
C

AR
MR
Q1 Q2 Qty
 Dead-Weight Loss for the Industry under Per. Comp.
Consumer’s
Surplus
Px Producer’s
Surplus
T S

P E Loss of CS
C
+
Loss of PS
B
Dead-Wt Loss

D
N
Q1 Q Qd, Qs
 Numerical on Consumer’s and Producer’s Surplus

Working simultaneously we get: q = 10 & p = 37.50

A(OPEQ) = (10)(37.5) = 375

Px
T
S
ps = 30 + 0.75qs
37.5 P E

pd = 40 – 0.25qd
N

Q
10 Qd, Qs
 Consumer’s Surplus Numerical

Px
T
S
Ps = 30 + 0.75qs
37.5 P E

Pd = 40 – 0.25qd
D

Q 10 Qd, Qs
 Consumer’s Surplus Numerical
A(OPEQ) = 375

Px
T
S
Consumer’s
Surplus
Ps = 30 + 0.75qs
37.5 P E

Pd = 40 – 0.25qd D

Q 10 Qd, Qs
 Producer’s Surplus Numerical

Px
T S

Ps = 30 + 0.75qs
37.5 P E

N
Pd = 40 – 0.25qd
D

Q 10 Qd, Qs
 Producer’s Surplus Numerical

A(OPEQ) = 375

Px
T S

Ps = 30 + 0.75qs
37.5 P E
Producer’s
Surplus

N
Pd = 40 – 0.25qd
D

Q 10 Qd, Qs
 Consumer’s and Producer’s Surplus Numerical

Px
T S

Consumer’s Ps = 30 + 0.75qs
Surplus = 12.5
37.5 P E
Producer’s
Surplus = 37.5

N
Pd = 40 – 0.25qd
D

Q 10 Qd, Qs
 Dead-Weight Loss Numerical

Px
T

A
S

Ps = 30 + 0.75qs
p = 37.5 B E

Pd = 40 – 0.25qd
C
D
N

Q1 = 5 Q =10 Qd, Qs
 Dead-Weight Loss Numerical

Px
T

A S

Ps = 30 + 0.75qs
p = 37.5 B E

Pd = 40 – 0.25qd
C
D
N

Q1 = 5 Q =10 Qd, Qs
 Dead-Weight Loss Numerical

Px
T

S Ps = 30 + 0.75qs
p = 37.5 B E

Pd = 40 – 0.25qd
C
D
N

Q1 = 5 Q =10 Qd, Qs