IB Economics - Ch 9 How do we model monopolies?



Unit 2 Micro Economics

CH9: Monopoly



| 11th Nov 2009

Assumptions of the model • There is one firm producing the product, the firm therefore is the industry • Barriers to entry and exit exist in the market which maintains the monopoly into the LR • Due to the barriers to entry monopolies can enjoy abnormal profits in the LR (or suffer losses in the LR)

Sources of monopoly power/barriers to entry • Economies of scale • Natural monopolies • Legal barriers • Brand loyalty • Anti-competitive behaviour

Profit maximisation under monopoly

Loss minimisation under monopoly

Are monopolies efficient?

Not productively efficient – But producing more for less?

Not allocatively efficient • Possibly dynamically efficient

Welfare loss of Monopoly

More QD at a lower P than PC with abnormal profit

Are monopolies in the public interest?

Possible advantages • Economies of scale and MES • Research and development • Dynamic efficiency • International competitiveness • Price discrimination • Improved quality • Cross subsidisation • Less choice may be better?

• Creative destruction Possible disadvantages • Diseconomies of scale • Allocative efficiency • Regressive effects • X inefficiency • Collusion • False choices


Extended Reading • Sloman J., Essentials of Economics 4 th – P119 to 127 Ed. • There are also a number of new books in the library which will be excellent reading for this section of the course