Chapter 7: Monopoly

Chapter 7MonopolyMonopoly Structure: Monopoly A monopoly is one firm that produces the entire market supply of a particular good or service.Because there is only one firm in a monopoly industry, the firm is the industry.7-*Monopoly = Industry In a monopoly structure, the firm’s demand curve is identical to the market demand curve for the product.7-*Price versus Marginal RevenueMarginal revenue (MR) is the change in total revenue that results from a one-unit increase in quantity sold.Price equals marginal revenue only for perfectly competitive firms.Marginal revenue is always less than price for a monopolist.7-*A monopolist can sell additional output only if it reduces prices.The MR curve lies below the demand curve at every point but the first.Price versus Marginal Revenue7-*Figure 7.17-*Profit MaximizationA monopolist:Makes pricing decisions that perfectly competitive firms cannot make.Uses the profit-maximization rule to determine its rate of output.Maximizes profit at the rate of output where MR = MC.7-*The profit maximization rule applies to all firms:A perfectly competitive firm produces the quantity where MC = MR (= p)A monopolist produces the quantity where MC = MR (< p), as do all imperfectly competitive firms.Profit Maximization7-*Figure 7.27-*The Monopoly Price The intersection of the marginal revenue and marginal cost curves establishes the profit-maximizing rate of output.The demand curve tells us the highest price consumers are willing to pay for that specific quantity of output.Only one price is compatible with the profit-maximizing rate of output.7-*Monopoly ProfitsTotal profit equals profit per unit times the number of units produced.Profit per unit = price minus average total cost:Profit per unit = p – ATCTotal profit = profit per unit times quantity: Total profit = (p – ATC) x q7-*Figure 7.3A monopolist produces less and charges a higher price than a competitive industry.A competitive industry produces 5 units and sells at $9, while a monopolist produces 4 units and sells at $10.7-*Barriers to EntryObstacles that make it difficult or impossible for would-be producers to enter a particular market.Examples include patents, legal harassment, exclusive licensing, bundled products, and government franchises.7-*Competition versus MonopolyIn competition, as well as in monopoly, high prices and profits signal consumers’ demand for more output.In competition, the high profits attract new suppliers.In monopoly, barriers to entry are erected to exclude potential competition.7-*In competition, production and supplies expand, and prices slide down the market demand curve.In monopoly, production and supplies are constrained, and prices don’t move down the market demand curve.Competition versus Monopoly7-*In competition, a new equilibrium is established, and average costs of production approach their minimum.In monopoly, no new equilibrium is established, and average costs are not necessarily at or near a minimum.Competition versus Monopoly7-*In competition, economic profits approach zero, and price equals marginal cost throughout the process.In monopoly, economic profits are at a maximum, and price exceeds marginal cost at all times.Competition versus Monopoly7-*In competition, the profit squeeze pressures firms to reduce costs or improve product quality.In monopoly, there is no profit squeeze to pressure the firm to reduce costs or improve product quality.Competition versus Monopoly7-*In duopoly, two firms together produce the industry output.In oligopoly, several firms dominate the market.In monopolistic competition, many firms each have a monopoly on their own brand image but must still contend with competing brands.Near Monopolies7-*Natural Monopoly A natural monopoly is an industry in which one firm can achieve economies of scale over the entire range of market supply. Examples include local telephone, cable, and utility services.Having two or more firms produce will require excessive duplication of production and distribution equipment.7-*How Does the Monopolist Answer the Questions?WHAT? – Less is produced and it is sold at higher prices.HOW? – There is no need to upgrade quality due to no competition.FOR WHOM? – Fewer customers can afford the product; producer will make greater profits.7-*Contestable Markets A contestable market is an imperfectly competitive industry subject to potential entry if prices or profits increase.How contestable a market is depends not so much on its structure as it does on its barriers to entry.7-*