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Pure Monopoly

• A single firm producing a homogenous or differentiated (unique) good and facing the market demand. • No substitutes • No new entries allowed • The monopoly is a price maker • P>MR • Possibility of a sustained economic profit

What circumstances lead to the formation of a monopoly? • • • • • • Extensive economies of scale: natural monopolies Exclusive patent rights Copy rights to intellectual properties Government franchises Exclusive access to a essential resource (input) Cartels A monopoly is a profit maximizer too! .

a $ Demand Faced by A Monopoly -2b -b 0 $ MR Dm Q TR Q 0 .

$ SMC P k m c SATC n D Q o Qe Qc MR .

The Dynamics of a Monopolistic Market • As a profit maximizer a monopoly may try to take advantage of economies of scale • A monopoly tends to try to protect its monopolistic position • A monopoly may take advantage of technological advances • A monopoly may face changes in demand • A monopoly may try to promote its product to maintain demand .

$ ATC>MC. P>MC. P>MR. P>ATC SMC P k SATC LATC n m D Q Qe L-R Positive Economic Profit o MR .

0016Q TC = 10. Q ...000 + .0184 Q Set MR = MC  Q = 4000.000 • Profit = (P.8 Profit = 307. MR = 80 .200 – 147.200 – 10.Monopolies and Profit Maximization • A monopoly faces the industry demand curve • To maximize profit: MR = MC P = 80 .0008Q .000 = 150.0092Q2 . MC = .ATC). P = 76.

g..Things Change • Demand may go down • Cost could increase • In an attempt to keep the potential competitors out. the monopolist may lower its price to near its average cost • Rent seeking: an attempt to maintain its monopolistic position by influencing the political processes-e. zoning laws • Closer substitutes may emerge .

$ ATC>MC. P = ATC SMC SATC LATC P D Qe L-R Zero Economic Profit o MR Q . P>MR. P>MC.

.The Case of Natural Monopolies • A natural monopoly emerges out of competition among firms in an industry with extensive economies of scale. • If unchecked. it under-produces and overcharges. the downward-sloping segment of the LATC curve extends to or beyond the market capacity (or market demand). • Smaller firms are gradually driven out by the larger (more efficient) firms. • The surviving firm would become a (natural) monopoly. a natural monopoly behaves like a monopoly.

$ SAC1 Natural Monopolies SAC2 SAC3 LAC D o Q1 Q2 Q3 Q .

$ LATC Natural Monopolies Monopoly Pricing Pm p AC LMC SAC SMC D o Qm MR Qc Q .

$ A Comparison Pm Pc MC MR o Qm Qc D Q .

Price Discrimination • Segmenting the market into separate classifications or regions • Assuming that each class of consumers have different demand. no intermarket redistribution of the product is allowed . a monopoly can charge different prices in each market segment To price-discriminate • The firm must identify consumer groups/classes with different downward-sloping demand curves • The firm must be able to prevent consumers of one class from reselling its product to the consumers of another class.

ATV P D D` MR Q o Q MR Q Q Price Discrimination .$ P` MC.

Monopsony vs. Monopoly MCL Wu Wc SL Wm MRPL:DL MRL o Eu Em Ec .

Cartels P.C P MCB MCA ATCA ATCB ΣMC Dm MR o QA Firm A o QB Firm B o Industry Q .C P.C P.

7908 ! ! ! !   % % Ð 2 # 4 " 72 4 " 72 4 3/:897 " ..