CHAPTER
12
Monopoly
Prepared by: Fernando Quijano
and Yvonn Quijano
© 2004 Prentice Hall Business Publishing
Principles of Economics, 7/e
Karl Case, Ray Fair
C H A P T E R 12: Monopoly and Antitrust Policy
Imperfect Competition and
Market Power: Core Concepts
• An imperfectly competitive
industry is an industry in which
single firms have some control over
the price of their output.
• Market power is the imperfectly
competitive firm’s ability to raise
price without losing all demand for its
product.
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 12: Monopoly and Antitrust Policy
Pure Monopoly
•
A pure monopoly is an industry
1. with a single firm that produces a
product for which there are no close
substitutes and
2. in which significant barriers to entry
prevent other firms from entering
the industry to compete for profits.
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 12: Monopoly and Antitrust Policy
Defining Industry Boundaries
• If the product that the monopolist
produces has many substitutes, the
monopolist will have a limited market
power.
• The more broader a market is, the
more difficult it becomes to find
substitutes.
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 12: Monopoly and Antitrust Policy
Barriers to Entry
•
A barrier to entry is something that
prevents new firms from entering and
competing in imperfectly competitive
industries.
1. Government franchises, or firms that
become monopolies by virtue of a
government directive.
2. Patents or barriers that grant the
exclusive use of the patented product or
process to the inventor.
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 12: Monopoly and Antitrust Policy
Barriers to Entry
3. Economies of scale and other cost
advantages enjoyed by industries that
have large capital requirements. A large
initial investment, or the need to embark
in an expensive advertising campaign,
deter would-be entrants to the industry.
4. Ownership of a scarce factor of
production: If production requires a
particular input, and one firm owns the
entire supply of that input, that firm will
control the industry.
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 12: Monopoly and Antitrust Policy
Price: The Fourth Decision Variable
• Firms with market power must
decide:
1. how much to produce,
2. how to produce it,
3. how much to demand in each
input market, and
4. what price to charge for their
output.
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 12: Monopoly and Antitrust Policy
Price and Output Decisions
in Pure Monopoly Markets
• To analyze monopoly behavior we assume
that:
• Entry to the market is blocked
• Firms act to maximize profit
• The pure monopolist buys inputs in
competitive input markets
• The monopolistic firm cannot price
discriminate
• The monopoly faces a known demand
curve
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 12: Monopoly and Antitrust Policy
Price and Output Decisions
in Pure Monopoly Markets
• In a monopoly market, there is no
distinction between the firm and the
industry because the firm is the
industry.
• The market demand curve is the
demand curve facing the firm, and
total quantity supplied in the market
is what the firm decides to produce.
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 12: Monopoly and Antitrust Policy
Price and Output Decisions
in Pure Monopoly Markets
• The demand curve facing a perfectly
competitive firm is perfectly elastic.
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 12: Monopoly and Antitrust Policy
Marginal Revenue
Facing a Monopolist
Marginal Revenue Facing a Monopolist
(1)
QUANTITY
(2)
PRICE
(3)
(4)
TOTAL REVENUE MARGINAL REVENUE
0
$11
0
-
1
10
$10
$10
2
9
18
8
3
8
24
6
4
7
28
4
5
6
30
2
6
5
30
0
7
4
28
-2
8
3
24
-4
9
2
18
-6
10
1
10
-8
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 12: Monopoly and Antitrust Policy
Marginal Revenue
and Market Demand
© 2004 Prentice Hall Business Publishing
• At every level of output
except one unit, a
monopolist’s marginal
revenue is below price.
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C H A P T E R 12: Monopoly and Antitrust Policy
Marginal Revenue and Total Revenue
© 2004 Prentice Hall Business Publishing
• The marginal revenue
curve shows the change in
total revenue that results
as a firm moves along the
segment of the demand
curve that lies exactly
above it.
• Total revenue is maximum
when marginal revenue
equals zero.
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C H A P T E R 12: Monopoly and Antitrust Policy
The Monopolist’s Profit-Maximizing
Price and Output
© 2004 Prentice Hall Business Publishing
• The profit-maximizing
level of output (Qm)
occurs where MR = MC.
• Notice that the outcome
is different from that of
perfect competition.
Here, the price ($4.00)
is less than the
marginal cost ($1.50),
and the monopolist
earns positive economic
profit.
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Karl Case, Ray Fair
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C H A P T E R 12: Monopoly and Antitrust Policy
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
supplied depends on both its
marginal cost curve and the demand
curve that it faces.
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 12: Monopoly and Antitrust Policy
Monopoly in the Long and Short-Run
• It is possible for a profit-maximizing monopolist to
suffer short-run losses and go out of business in the
long-run.
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 12: Monopoly and Antitrust Policy
Perfect Competition
and Monopoly Compared
• In a perfectly competitive industry in the
long-run, price will be equal to long-run
average cost.
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 12: Monopoly and Antitrust Policy
Perfect Competition
and Monopoly Compared
• Relative to a competitively organized industry,
a monopolist restricts output, charges higher
prices, and earns positive profits.
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 12: Monopoly and Antitrust Policy
The Social Costs of Monopoly
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• Monopoly leads to
an inefficient mix of
output.
• Price is above
marginal cost, which
means that the firm
is underproducing
from society’s point
of view.
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C H A P T E R 12: Monopoly and Antitrust Policy
The Social Costs of Monopoly
© 2004 Prentice Hall Business Publishing
• The triangle ABC
measures the net
social gain of moving
from 2,000 units to
4,000 units (or
welfare loss from
monopoly).
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C H A P T E R 12: Monopoly and Antitrust Policy
Price Discrimination
• Charging different prices to different
buyers is called price discrimination.
• A firm that charges the maximum
amount that buyers are willing to pay
for each unit is practicing perfect price
discrimination.
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 12: Monopoly and Antitrust Policy
Price Discrimination
© 2004 Prentice Hall Business Publishing
• A monopolist who
cannot price
discriminate would
maximize profit by
charging $4.
• There is profit and
consumer surplus.
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C H A P T E R 12: Monopoly and Antitrust Policy
Price Discrimination
© 2004 Prentice Hall Business Publishing
• For a perfectly price
discriminating
monopolist, the demand
curve is the same as
marginal revenue.
• There is profit but no
consumer surplus.
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Karl Case, Ray Fair
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C H A P T E R 12: Monopoly and Antitrust Policy
Natural Monopoly
• A natural monopoly is an
industry that realizes such
large economies of scale in
producing its product that
single-firm production of that
good or service is most
efficient.
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Principles of Economics, 7/e
Karl Case, Ray Fair
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C H A P T E R 12: Monopoly and Antitrust Policy
Natural Monopoly
© 2004 Prentice Hall Business Publishing
• With one firm
producing 500,000
units, average cost is
$1 per unit. With five
firms each producing
100,000 units,
average cost is $5
per unit.
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