 Firm
that is sole seller of product without
close substitutes
 Price Maker not a Price Taker
 There are barriers to entry thru:
Monopoly Resources, Gov’t Regulation or
Production Process
 Will produce when P > MC
 One
firm has sole ownership of a key
resource used in production of a good
 DeBeers is good example with diamonds
 Usually
created because of use of patents
and copyrights
 Trade-off is less competition, but encourages
research & development
A
single firm can supply a good/service to a
market at a smaller cost than 2 or more firms
could
 There are economies of scale, ATC falls as
scale becomes larger
 Demand
curve for monopolist is downward
sloping, not perfectly elastic as in a
competitive market
 MR
is always less than P for monopolist
 True because of downward shaped D curve
 When monopolist increases Q, there is an
output effect (higher Q, increases TR) and a
price effect (lower P, decreases TR)
 MR can even be negative if price effect is
greater than output effect
 Also
produce where MR = MC just like
competitive markets
 However for a monopoly:
P > MR = MC
 So monopolist sets Q where MR = MC then
goes up to Demand curve to set P
 Profit
= (P – ATC) x Q
 Does
a monopoly maximize total surplus?
 To do this, we would need to produce where
Demand & MC intersect
 Monopolist
produces less than the socially
efficient quantity of output
 Similar to situation with a tax, but instead of
tax revenue it is profit to the monopolist
 Monopoly’s
profit gives producers more
surplus than consumers’ surplus, but keeps
same total surplus as it would have had
 Deadweight loss is created by inefficiently
low level of output, not really the higher
price
 Selling
the same good at different prices to
different customers
 Ex: Hardback vs. Paperback Novels
 Strategy for monopolists to increase profit
 Requires ability to separate customers based
on their willingness to pay
 Can raise economic welfare by lowering
DWL, shows up as higher producer surplus
 Buying
a good at a lower price in one market
and reselling it in another market at a higher
price
 This prevents price discrimination by
monopolists
 Monopolist
knows exactly each customer’s
willingness to pay and can charge each
person a different price
 In this case, consumer surplus is zero and
total surplus equals the firm’s profit – no
DWL
 Movie
tickets
 Airline prices
 Discount coupons
 Financial aid
 Quantity discounts
1. Antitrust Laws
- Sherman Antitrust Act (1890)
- Clayton Antitrust Act (1914)
• Allows gov’t to prevent mergers that limit
competition, and can break up companies
that reduce social welfare
• Can the gov’t effectively judge social benefit
vs. social cost?
2. Regulation
- Often regulate prices of natural monopolies
(PUCO)
- Where does the gov’t set the price? MC
pricing?
• Problem with that is MC < ATC for
monopolist, so this would mean the company
loses $
 Alternatives:
1.
2.
3.
Subsidize the monopoly: but this creates
need for taxes to pay for it & more DWL
Average-cost pricing: like a tax on the good
because P no longer = MC
MC-pricing also gives no incentive to
monopolist to lower costs (unless you let
them keep part of cost savings as profit)
3. Public Ownership
- Common in Europe; in U.S., we do this with
Post Office
- Problem again is creating incentive to cut
costs
4. Doing Nothing
- All “solutions” to monopolies have their
drawbacks, so many economists prefer doing
nothing