IB Economics - Ch 9 How do we model monopolies?



Unit 2 Micro Economics

CH9: Monopoly

source: http://news.bbc.co.uk/2/hi/business/8354491.stm

| 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


• 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 Ed.

– P119 to 127

• There are also a number of new books in the library which will be excellent reading for this section of the course