Monopoly

0
 Features
 A monopoly is a firm that is the sole seller of a
product.
 No close substitutes.
 A monopoly firm has market power, the ability to
influence the market price of the product it sells.
 Strong barriers to entry.
 Single price or discriminating price.

1
Monopoly vs. Competition: Demand Curves
In a competitive market,
the market demand curve
slopes downward.
A competitive firm’s
but the demand curve demand curve
for any individual firm’s P
product is horizontal
at the market price.
D=MR=P
The firm can increase Q
without lowering P,
so MR = P for the
competitive firm. Q

2
Monopoly vs. Competition: Demand Curves

A monopolist is the only

seller, so it faces the
market demand curve.
A monopolist’s
To sell a larger Q, demand curve
P
the firm must reduce P.
Thus, MR ≠ P.

D
Q

3
ACTIVE LEARNING 1:
A monopoly’s revenue
Moonbucks is
Q P TR AR MR
the only seller of ice
cream in town. 0 $4.50 n.a.
The table shows the 1 4.00
market demand for
2 3.50
ice cream.
3 3.00
Fill in the missing
spaces of the table. 4 2.50

What is the relation 5 2.00

between P and AR? 6 1.50
Between P and MR?
4
ACTIVE LEARNING 1:
Answers

Q P TR AR MR
Here, P = AR,
same as for a 0 $4.50 $0 n.a.
$4
competitive firm. 1 4.00 4 $4.00
3
Here, MR < P, 2 3.50 7 3.50
whereas MR = P 2
for a competitive 3 3.00 9 3.00
1
firm. 4 2.50 10 2.50
0
5 2.00 10 2.00
–1
6 1.50 9 1.50

5
Moonbuck’s D and MR Curves

P, MR
$5
4
Demand curve (P)
3
2
1
0
-1 MR
-2
-3
0 1 2 3 4 5 6 7 Q

6
 Profit-Maximization
 Like a competitive firm, a monopolist maximizes
profit by producing the quantity where MR = MC.
 Once the monopolist identifies this quantity,
it sets the highest price consumers are willing
to pay for that quantity.
 It finds this price from the D curve.

7
 Profit-Maximization

Costs and
1. The profit- Revenue MC
maximizing Q
is where P
MR = MC.
2. Find P from
the demand D
curve at this Q. MR

Q Quantity

Profit-maximizing output
8
 The Monopolist’s Profit

Costs and
Revenue MC

As with a P
ATC
competitive firm, ATC
the monopolist’s
profit equals D
(P – ATC) x Q MR

Q Quantity

9
 The Welfare Cost of Monopoly
Competitive eq’m:
Price Deadweight
quantity = QE loss MC
P = MC
total surplus is P
P = MC
maximized
MC
Monopoly eq’m:
D
quantity = QM
P > MC MR
deadweight loss Q M QE Quantity

10
 Price Discrimination
 Discrimination is the practice of treating people
differently based on some characteristic, such as
race or gender.
 Price discrimination is the business practice of
selling the same good at different prices to
different buyers.
 The characteristic used in price discrimination
is willingness to pay (WTP):
• A firm can increase profit by charging a higher
price to buyers with higher WTP.

11
 Perfect Price Discrimination vs.
Single Price Monopoly
Here, the monopolist Consumer
charges the same Price
surplus
price (PM) to all
Deadweight
buyers. PM loss
A deadweight loss
results. MC
Monopoly
profit D
MR

QM Quantity

12
 Perfect Price Discrimination vs.
Single Price Monopoly
Here, the monopolist
produces the Price
competitive quantity, Monopoly
profit
but charges each
buyer his or her WTP.
This is called perfect
MC
price discrimination.
D
The monopolist
captures all CS MR
as profit.
Quantity
But there’s no DWL. Q
13
 Kinds of Price discrimination
 First degree price discrimination = price each
at the consumer’s WTP
 Second degree of price discrimination= price
per unit goes down if the consumer buys more
quantity (discounts)
 Third degree of price discrimination =
different price to different consumer groups/
segments/region

14
 Price Discrimination in the Real World
 In the real world, perfect price discrimination is
not possible:
• no firm knows every buyer’s WTP
• buyers do not announce it to sellers
 So, firms divide customers into groups
based on some observable trait
that is likely related to WTP, such as age.

15
 Examples of Price Discrimination
Movie tickets
Discounts for seniors, students, and people
who can attend during weekday afternoons.
They are all more likely to have lower WTP
than people who pay full price on Friday night.
Airline prices
Discounts for Saturday-night stayovers help
distinguish business travelers, who usually have
higher WTP, from more price-sensitive leisure
travelers.

16
 Examples of Price Discrimination
Need-based financial aid
Low income families have lower WTP for
their children’s college education.
Schools price-discriminate by offering
need-based aid to low income families.

17
 Examples of Price Discrimination
Quantity discounts
A buyer’s WTP often declines with additional
units, so firms charge less per unit for large
quantities than small ones.
Example: A movie theater charges $4 for
a small popcorn and $5 for a large one that’s
twice as big.

18
CONCLUSION: The Prevalence of Monopoly
 In the real world, pure monopoly is rare.
 Yet, many firms have market power, due to
• selling a unique variety of a product
• having a large market share and few significant
competitors
 In many such cases, most of the results from
this chapter apply, including
• markup of price over marginal cost
• deadweight loss

19
CHAPTER SUMMARY
 A monopoly firm is the sole seller in its market.
Monopolies arise due to barriers to entry,
including: government-granted monopolies, the
control of a key resource, or economies of scale
over the entire range of output.
 A monopoly firm faces a downward-sloping
demand curve for its product. As a result, it must
reduce price to sell a larger quantity, which causes
marginal revenue to fall below price.

CHAPTER 15 MONOPOLY 20
CHAPTER SUMMARY
 Monopoly firms maximize profits by producing the
quantity where marginal revenue equals marginal
cost. But since marginal revenue is less than
price, the monopoly price will be greater than
marginal cost, leading to a deadweight loss.
 Policymakers may respond by regulating
monopolies, using antitrust laws to promote
competition, or by taking over the monopoly and
running it. Due to problems with each of these
options, the best option may be to take no action.

CHAPTER 15 MONOPOLY 21
CHAPTER SUMMARY
 Monopoly firms (and others with market power) try
to raise their profits by charging higher prices to
consumers with higher willingness to pay. This
practice is called price discrimination.

CHAPTER 15 MONOPOLY 22