Monopoly

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Recap

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TODAY……………we discuss..
Market Power

Pricing by Firms Under imperfect Competition

Understanding how price is determined and
profits are maximized by a firm in imperfect
competition.

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Some Examples for Monopoly
Indian Railways
Microsoft
Google
Telkom-a semi-privatised, part state-owned South
African telecommunications company.
Monsanto-  has been sued by competitors for anti-trust and
monopolistic practices. They have between 70% and 100% of
the commercial seed market [American multinational chemical,
and agricultural biotechnology corporation].
Comcast - has a monopoly in Boston, Philadelphia, and
Chicago [ largest mass media and communications company in
the world by revenue]

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Features of Monopoly
Single firm
Sells a product without close substitutes
Monopolist represents the Market
Faces the Market’s Downward sloping DD curve

Earn profits in the LR – since entry into the

industry is blocked…

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Reasons for a monoploy
One, The firm may control entire supply of raw
materials required to produce the product
Two, the firm may own a patent or copyright -
which precludes other firms from using a
particular production process or producing the
same product. Eg., Xerox-copying machines,,&
Polaroid –instant cameras.
Three, economies of Scale operating---natural
monopoly—eg., Public utilities
Four, established by govt. franchise
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Price and output determination in the SR
Price maker-maximizes profits or minimizes
losses by setting the price in the SR.

Single seller with no close substitutes…so faces a

downward sloping DD curve for the product…
The MR curve is below the AR curve- WHY?
To sell an addl. unit the price has to be
lowered…Therefore, MR is lower than the
product price…and the MR curve is below the
AR curve…..
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Short-run price and output determination

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 In the SR, the monopolist could earn Profits, as
shown in the diagram…… OR
He could BreaK Even ………
If, ATC = P ……….OR

He could make losses….

If ATC > P….
So long as P > AVC, monopolist remains in
business..because it minimizes losses….

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Slope of the MR curve is double that of
the AR curve (-when DD curve is linear)
Proof:
 Let the DD fn. be
 P = a-bQ ,
(Where a is the vertical / price intercept and –b is
the slope of the DD curve)
TR= p * Q = (a-bQ) * Q = aQ-bQ²
And MR = d(TR)/dQ = a-2bQ.

Therefore, MR curve has the same vertical intercept, but its

absolute slope (2b) is twice the slope of the AR curve(b).
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 LR Price & Output Determination

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 Best level of output, where LMC = MR..
• But the firm earns economic profits in the LR
under monopoly, unlike PC….WHY?
• Because entry into the market is blocked….and so
he is also not likely to produce at the lowest
point of the AC curve…..
• That can happen only in the extreme case of the
MR curve going through the lowest point of the
AC curve…but even then, the monopolist charges a
price higher than the LAC…..
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Comparison b’ween PC & monopoly
Under PC, in LR equilibrium, firm produces at
lowest point on LAC curve and charges a price
equal to lowest LAC…and earns zero economic
profits..
Under monopoly, LR equlibrium is unlikely to be on
the lowest point of the LACcurve..and because
entry is blocked…it is likely to earn economic
profits even in the LR….

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 But is Perfect competition more efficient than
monoploy?

Only if the output level at the lowest point on the

LAC curve is very small in relation to the market
DD..so as to allow many firms to operate..and if
the product is homogenous,,,PC is possible…

Salvatore ..See pages 334-335

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Social cost of monopoly
Dead-weight loss of monopoly…associated with
the reduced level of output and the higher price
level in monopoly….
See diagram on page 336- Dominick Salvatore

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