MICROECONOMICS: Theory &
Applications
Chapter 11: Monopoly
By
Edgar K. Browning & Mark A. Zupan
John Wiley & Sons, Inc.
10th Edition, Copyright 2009
PowerPoint prepared by Della L. Sue, Marist College
Learning Objectives

Define monopoly and show what a
monopolist’s demand and marginal revenue
curves look like.
 Explain why a monopolist’s profit-maximizing
output is where marginal revenue equals
marginal cost.
 Describe why the extent to which a
monopolist’s price exceeds marginal cost is
larger the more inelastic the demand faced by
the monopolist.
(continued)
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Learning Objectives
(continued)

Understand why the shutdown condition
applies to monopolies as well as to firms
operating in a perfectly competitive market.
 Outline the potential sources of monopoly
power: absolute cost advantages, economies
of scale, product differentiation, and regulatory
barriers.
 Explore the efficiency effects of monopoly from
a static as well as a dynamic perspective.
 Overview public policy toward monopoly.
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Terminology
Monopoly – a market with a single seller
 Monopoly power – some ability to set price
above marginal cost
 Price maker – a monopoly that supplies the
total market and can choose any price
along the market demand curve that it
wants

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The Monopolist’s Demand Curve and
Total Revenue
[Figure 11.1]
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Table 11.1
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Table 11.2
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Profit-Maximizing Output of a
Monopoly

Marginal revenue is
always less than price
when the demand curve
slopes downward.

Profit is maximized
where MR=MC.

Figure 11.2
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Profit Maximization
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[Figure 11.3]
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The Monopoly Price and Its
Relationship to Elasticity of Demand
P = MC/[1 – (1/η)]
The smaller the demand elasticity, the
greater the profit-maximizing price,
relative to marginal cost.
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The Inverse Elasticity Pricing Rule
[Figure 11.4]
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Further Implications of Monopoly
Analysis

A monopoly has no supply curve.
 A monopoly does not necessarily make
positive economic profit.
 A monopoly’s demand curve is elastic
where marginal revenue is positive.
 A profit-maximizing monopolist will always
sell at a price where demand is elastic.
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Monopoly and the Shutdown
Condition
[Figure 11.5]
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Monopoly Demand, Marginal Revenue,
and Total Revenue
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[Figure 11.6]
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Monopoly Power When There are
Several Suppliers
[Figure 11.7]
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Measuring Monopoly Power
Lerner Index – a means of measuring a
firm’s monopoly power that takes the
markup of price over marginal cost
expressed as a percentage of a product’s
price:
Lerner Index = (P – MC)/P
 The Lerner index varies between zero and
one.
 The larger the Lerner index value, the
greater a firm’s monopoly power.

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Sources of Monopoly Power

What factors determine the extent to
which a firm has monopoly power?

The elasticity of the market demand curve


If the market demand curve is perfectly elastic,
any individual supplier has no monopoly
power.
The elasticity of supply by other firms

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The monopoly power of any one firm is more
limited when there is a greater number of rival
firms.
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Barriers to Entry

Barrier to entry – any factor that limits the number of firms
operating in a market and thereby serves to promote monopoly
power

Categories:


Absolute cost advantage
 A situation in which an incumbent firm’s production cost
(long-run average total cost) is lower than potential
rivals’ production costs at all relevant output levels
Economies of scale
 A situation in which the long-run average total cost
curve for all firms slopes downward over the entire
range of market output
 Natural monopoly – an industry in which production cost
is minimized if one firm supplies the entire output.
(continued)
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Barriers to Entry

(continued)
Categories (continued):

Product differentiation


Regulatory barriers

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A means by which consumers may perceive the product
sold by an incumbent firm to be superior to that offered by
prospective rivals.
Barriers to entry created by the government through
vehicles such as patents, copyrights, franchises, and
licenses
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Strategic Behavior by Firms: Incumbents
and Potential Entrants
[Figure 11.8]
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The Efficiency Effects of Monopoly
[Figure 11.9]
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A Dynamic View of Monopoly and
Its Efficiency Implications

Static analysis – a form of
economic analysis that
looks at the efficiency of a
market at any one point in
time

Dynamic analysis – a form
of economic analysis that
looks, over time, at the
efficiency of a market

Figure 11.10
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Public Policy Toward Monopoly
Antitrust laws – a series of codes and
amendments intended to promote a
competitive market environment
 3 major statutes:

Sherman Act (1890)
 Clayton Act (1914)
 Federal Trade Commission Act (1914)

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Regulation of Price

Price ceiling –
eliminates the
monopolist’s reason
for restraining
output

Figure 11.11
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The Math Behind Monopoly

The Monopolist’s Demand and Marginal
Revenue Curves
MR = P(1 – 1/η)

The Monopolist’s Profit-Maximizing Output
Choice
MR=MC
P + Q(dP/dQ) = dC/dQ
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