Unit 7 - Monopoly

Characteristics of a Monopoly
 A monopoly industry is an industry with
only one seller (mono = 1; poly = seller).
 Most monopolies have significant
economies of scale.
Microeconomics
Unit 7 - Monopoly

Reasons for Monopoly Forming
1.
2.
3.
4.
5.
6.
Monopolies exist for the following reasons:
Legal barriers (U.S. Postal Service)
Patents and copyrights (games, books, tv shows)
Licenses (doctors, taxi drivers)
Trade restrictions (prescription medication)
Exclusive ownership (DeBeers Diamonds Co.)
Economies of Scale
(Microsoft, Intel)
Microeconomics
Unit 7 - Monopoly

Types of monopolies
We distinguish between these two types of
monopolies:
1. Government-granted. The government
grants the monopoly. Examples: U.S. Postal
Service, gas and electric companies.
2. Free market. The monopoly is earned through
innovations, efficiency, or resource control.
Examples: Microsoft, Intel, DeBeers.
Microeconomics
Unit 7 - Monopoly

Types of monopolies
In the case of government-granted monopolies, there
is little incentive for the monopoly to earn profits.
Economic efficiency is unlikely.
In the case of free market monopolies, there is a threat
of competition. Most firms keep their monopoly status
by operating efficiently, offering quality products and
low prices.
Microeconomics
Unit 7 - Monopoly

A Monopolist’s Demand Curve
Quantity/Month Price
0
$40
1,000
$35
2,000
$30
3,000
$25
Microeconomics
Unit 7 - Monopoly

A Monopolist’s Total, Marginal, and
Average Revenue
Q
Price
TR
AR
MR
0
$40
0
-
-
1,000
$35
$35,000
$35
$35
2,000
$30
$60,000
$30
$25
3,000
$25
Fill in
the
blank
Fill in
the
blank
Fill in
the
blank
Microeconomics
Unit 7 - Monopoly

A Monopolist’s Total, Marginal, and
Average Revenue
Q
Price
TR
AR
MR
0
$40
0
-
-
1,000
$35
$35,000
$35
$35
2,000
$30
$60,000
$30
$25
3,000
$25
$75,000
$25
$15
Microeconomics
Unit 7 - Monopoly

A Monopolist’s Demand and Marginal
Revenue Curve
Revenue
Demand=AR
MR
Quantity
Microeconomics
Unit 7 - Monopoly
 The
Profit Maximizing Quantity
MC
Revenue
MR=MC
Demand = AR
MR
Qpm
Profit-maximizing quantity
Quantity
Microeconomics
Unit 7 - Monopoly
 The
Profit Maximizing Price
MC
Revenue
Ppm
Profitmaximizing
price
Demand = AR
MR
Qpm
Quantity
Microeconomics
Unit 7 - Monopoly
 The
Profit Area
MC
Revenue
ATC
$30
$27
Demand = AR
MR
2,000
Quantity
Microeconomics
Unit 7 - Monopoly

United States Anti-trust Legislation
Anti-trust = Anti-monopoly
Main anti-trust laws passed in the United States:
1. The Sherman Act of 1890
2. The Clayton Act of 1914
3. The Federal Trade Commission Act of 1914
Microeconomics
Unit 7 - Monopoly

United States Anti-trust Legislation
The Sherman Act outlaws all contracts,
combinations and conspiracies that
unreasonably restrain interstate and foreign
trade.
Microeconomics
Unit 7 - Monopoly

United States Anti-trust Legislation




The Clayton Act prohibits:
Price discrimination, if it leads to monopoly
forming.
Mergers and acquisitions, which lead to
monopoly forming.
A person from being a director of two or
more competing corporations.
Exclusives dealing arrangements, if these
arrangements lead to monopoly forming.
Microeconomics
Unit 7 - Monopoly

United States Anti-trust Legislation
The Federal Trade Commission Act
established the Federal Trade Commission.
Along with the anti-trust Division of the
Department of Justice, enforces anti-trust
laws.
Microeconomics
Unit 7 - Monopoly

United States Anti-trust Legislation
Do we need anti-trust laws?
Alan Greenspan and Milton Friedman believe
that they do more harm than good.
If a company achieves its monopoly status
through efficiency and innovation, then its
services, low cost, and low prices can be
beneficial for society and our economy.
Microeconomics