Monopoly (điện)
 Monopolist: sole supplier of good in market without close
substitute
 Price setter, not taker
 Has market power
 Natural monopoly – where average costs is naturally lower
with one firm than with several (có lợi thế về yếu tố đầu vào
nên cho phép giảm chi phí sản xuất trong khi mở rộng quy
mô)
 Average revenue: price received per unit sold.
 Marginal revenue: change in revenues resulting from a unit
increase in output
Profit maximizing => MR = MC
Why do we say that MR=MC for a monopolist? Well, what if
MR>MC?
=> This means that we could increase our profit from
expanding output, as TR will increase by more than TC.
=> Analogously, MC>MR means we could increase profit by
contracting output. If we contract output, then it means that
TC will decrease, but by more than TR
Barriers to Entry
 Monopoly resources
 Government regulation
 Nature of production
 Business strategies
 Costs suffered by consumers if they switch supplier
Monopoly Demand Curve (demand function: P = a – bQ)
 Only seller, faces market demand curve
 MR ≠ P because they have market power
 Increase in TR due to increase in sales
 Decreased in TR due to fall in market price for all previously
produced output units
Monopolist MR & Elasticity
Lerner’s Index
 Monopoly power determined by firm’s PED
 If demand is more elastic, markup (price) becomes small
 If demand is more inelastic, markup becomes larger, Ed
smaller in absolute value
 Left hand side: firm’s markup
 Right hand side: Lerner’s index
Interpretation: we can see the difference between price and
marginal cost expressed as a percentage of the profit-
maximising price.
 So, if the elasticity is -2, this means that the profit-
maximising mark-up would be ½. Conversely, this means that
the profit maximising price is twice the MC.
 Lerner index can range from 0 (perfect comp) to just under
1, measure of a firm’s market power
 High Lerner index = more market power, low Lerner index =
less market power
 Perfectly elastic demand, Ed = -∞, Lerner index value = 0
 Firm’s markup is 0 (price taker), perfect competition
Price Discrimination (First Degree)
 Firm observes consumers’ willingness to pay
 Charge each consumer their willingness to pay, as long as it
is greater than MC
 Allocation is efficient, max total surplus, but it is all
producer surplus
Second Degree
 Quantity discounts and similar
 Consumers cannot be distinguished directly but have
different preferences with respect to Q
 Different consumption bundles can be offered to allow
consumers to self-select
Third Degree
 Sell at different prices to different consumer groups
 Market power (monopoly)
 Groups cannot sell goods between them (adult can’t use kid
discounted ticket)
 Firms will sell at higher prices to consumers with lower PED
(standard adults)
The 5 sources of monopoly
There are five conditions resulting in monopolies forming in
the markem:
1. Exclusive control over important inputs (other firms cannot
really get into the diamond business)
2. Economies of scale (a decreasing LAC curve will lead to a
natural monopoly)
3. Patents
4. Network economies
5. Government licences or franchises
Factors determining demand elasticity:
- Elasticity of market demand: the elasticity of market
demand will limit the potential for monopoly power.
- Number of companies in the market: if there are many
companies, it is unlikely that a single company has the ability
to significantly influence the price.
- Interaction between companies: no company has the
opportunity to increase the price much at a profit as the rivalry
between the companies is aggressive- Highly concentrated: if
only a few companies charge for most of the sell in the market
Antitrust laws Monopolistic competition
This is where legislation makes it illegal to monopolise, or to
take action which would undermine your competition (by  market in which firms enter freely
buying shares and degrading their value, for argument’s sake)
 monopolistic competition in short run: act like monopolist
Monopsony * downward sloping demand curve => differentiated product
 single buyer - takes advantage of sellers * profit-maximizing quantity at MR=MC, and charge a higher
 marginal value - additional benefit from purchasing another price according to demand curve (like monopoly)
good
 marginal expenditure - additional cost from purchasing
another good
* E = expenditure = P(q)q
* but P(q) in this case set by supply curve, not demand
* AE =average expenditure = P(q)
* quantity bought found D = ME
* price found by dropping down to corresponding price on
supply curve
 monopolistic competition in long run
degree of monopsony power - depends on # of buyers,
interaction between buyers * Economic profit induces entry of new firms & entry
 fewer buyers => supply becomes less elastic => more continues as long as firms in industry earn an economic profit:
monopsony power P>ATC
* if firms incur economic losses, exit will occur => exit
 buyers compete less => more monopsony power
process ends when all firms in industry are making zero
more elastic supply => markdown (p-p*) will be less
economic profit
Monopsony Power
Sources of Monopsony Power
 Elasticity of Market Supply (If only one buyer is in the
market, its monopsony power is completely determined by the
elasticity of market supply. If supply is highly elastic,
monopsony power is small)

 Number of Buyers (When the number of buyers is very

large, no single buyer can have much influence over price)

 Interaction Among Buyers (If four buyers in a market
compete aggressively, they will bid up the price close to their
marginal value of the product, and will thus have little
monopsony power)
Bilateral monopoly: market with only one seller and one
buyer
Pricing with market power
 Price discrimination: charging consumers based on
individualcharacteristics of the consumer or quantity
purchased by consumers - Example: discounts for students or
senior citizens
 Two part pricing: Charges one fee for the right to purchase
the good and an additional fee for each unit purchased -
Example: golf clubs annual fee and additional amount each
time you play golf
 Bundling: Several items are sold together as a package
 Peak load pricing: Higher prices in periods of peak demand-
Example: airline tickets
* profits are driven to zero
* zero profit => TR = TC and P = ATC
Oligopoly
* produce identical product and compete only on price
* produce differentiated product and compete on price,
product quality and marketing
 Collusion: the act of working together to make decisions
about price and quantity
 Dominant strategy: a strategy that is the best one for a player
to follow no matter what strategy other players choose
 Nash equilibrium: an equilibrium reached when all players
choose the best strategy they can, given the choices of all other
players
 Cartel: a number of firms collude to make decisions about
quantity and price (example: OPEC)
 Reaction curve: relationship between firm’s profit-
maximizing output and amount it thinks competitor produces