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 imperfectly competitive industry An industry in which single firms have some control over the price of their output.
market power An imperfectly competitive firm’s ability to raise price without losing all of the quantity demanded for its product.
 Imperfect competition does not mean that no competition exists in the market.
 In some imperfectly competitive markets competition occurs in more arenas than in perfectly competitive markets.
 Firms can differentiate their products, advertise, improve quality, market aggressively, cut prices, and so forth.
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DEFINING INDUSTRY BOUNDARIES
 The ease with which consumers can substitute for a product limits the extent to which a monopolist can exercise market power.
 The more broadly a market is defined, the more difficult it becomes to find substitutes.
 pure monopoly An industry with a single firm that produces a product for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profits.
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BARRIERS TO ENTRY
 barrier to entry Something that prevents new firms from entering and competing in imperfectly competitive industries.
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Government franchise A monopoly by virtue of government directive.
Patent A barrier to entry that grants exclusive use of the patented product or process to the inventor.
Economies of Scale and Other Cost Advantages
Ownership of a Scarce Factor of Production
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PRICE: THE FOURTH DECISION VARIABLE
 Regardless of the source of market power, output price is not taken as given by the firm. Instead:
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Price is a decision variable for imperfectly competitive firms.
Firms with market power must decide not only
(1) how much to produce,
(2) how to produce it,
(3) how much to demand in each input market
(4) what price to charge for their output.
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
 To analyze monopoly behavior, we make two assumptions:
(1) that entry to the market is blocked, and
(2) that firms act to maximize profits.
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
DEMAND IN MONOPOLY MARKETS
The Demand Curve Facing a Perfectly Competitive Firm Is Perfectly Elastic;
In a Monopoly, the Market Demand Curve Is the Demand Curve Facing the Firm
With one firm in a monopoly market, there is no distinction between the firm and the industry.
In a monopoly, the firm is the industry. The market demand curve is the demand curve facing the firm, and the total quantity supplied in the market is what the firm decides to produce.
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
 By knowing the demand curve it faces, the firm must simultaneously choose both the quantity of output to supply and the price of that output.
 Once the firm chooses a price, the market determines how much will be sold.
 The monopoly chooses the point on the market demand curve where it wants to be.
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
Marginal Revenue and Market Demand
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For a monopolist, an increase in output involves not just producing more and selling it, but also reducing the price of its output to sell it.
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
Marginal Revenue Curve Facing a Monopolist
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
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A profit-maximizing monopolist will continue to produce output as long as MR exceeds MC.
Because the market demand curve is the demand curve for a monopoly, a monopolistic firm faces a downward-sloping demand curve.
The monopolist must lower the price it charges to raise output and sell it.
Selling the additional output will raise revenue, but this increase is offset somewhat by the lower price charged for all unit sold.
Therefore, the increase in revenue from increasing output by one (MR) is less than the price.
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
Marginal Revenue and
Total Revenue
A monopoly
’s marginal revenue curve shows the change in total revenue that results as a firm moves along the segment of the demand curve that lies directly above it.
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
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At zero units →TR=0
 To begin selling, the firm must lower the product price (MR>0, TR begins to increase)
 To sell more, the firm must lower its price more and more
Output between 0 and Q* → firm moves down on its demand curve from A to B: MR>0, TR continues to increase
 Q rising pushing TR (PxQ) up and P falling pushing TR down
Up to point B → the effect of increasing Q dominates the effect of falling P: TR rises, MR>0
Point B toward C → lowering P to sell more Q, but above
Q* : MR<0, TR starts to fall
Beyond Q* → the effect of cutting P on TR is larger than the effect of increasing Q: TR falls
At C → TR=0 because P=0
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
The Monopolist
’s Profit-Maximizing Price and
Output
Price and Output Choice for a Profit-Maximizing Monopolist
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
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All firms, including monopolies, raise output as long as marginal revenue is greater than marginal cost.
Any positive difference between marginal revenue and marginal cost can be thought of as marginal profit.
The profit-maximizing level of output for a monopolist is the one at which marginal revenue equals marginal cost:
MR = MC.
The Absence of a Supply Curve in Monopoly
 A monopoly firm has no supply curve that is independent of the demand curve for its product.
 A monopolist sets both price and quantity, and the amount of output that it supplies depends on both its marginal cost curve and the demand curve that it faces.
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
Monopoly in the Long and Short Run
Price and Output Choice for a Monopolist
Suffering Losses in the Short Run
If a firm can reduce its losses by operating in the short run, it will do so.
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
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Perfectly competitive markets: Long run and short run
 Short run → fixed factor of production, no entry and exit
(MC increase with Q)
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Long run → free entry and exit, LR equilibrium where industry profits equal to zero
Monopoly:
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Short run → limited with fixed factor of production
(diminishing returns to factors of production)
Long run → if monopoly earning positive profits, nothing will happen (entry blocked)
 Monopoly will operate at the most efficient scale of production (no change in LR)
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
PERFECT COMPETITION AND MONOPOLY
COMPARED
A Perfectly Competitive Industry in Long-run Equilibrium
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
Comparison of Monopoly and Perfectly Competitive Outcomes for a
Firm with Constant Returns to Scale
Relative to a perfectly competitive industry, a monopolist restricts output, charges higher prices, and earns positive profits.
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PRICE AND OUTPUT DECISIONS
IN PURE MONOPOLY MARKETS
COLLUSION AND MONOPOLY COMPARED
 collusion The act of working with other producers in an effort to limit competition and increase joint profits.
 The outcome would be exactly the same as the outcome of a monopoly in the industry.
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INEFFICIENCY AND CONSUMER LOSS
Welfare Loss from Monopoly
Monopoly leads to an inefficient mix of output.
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 price discrimination Charging different prices to different buyers.
 perfect price discrimination Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit.
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Price Discrimination
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