Chapter 15: Monopoly

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Chapter 15 Monopoly

• Economics 2420

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In this chapter, you will

• Learn why some markets have one seller
• Analyze how a monopolist determines the quantity
  to produce and what price to charge
• See how the monopolists decisions affect the
  economic well being of consumers
• See why monopolists try to charge different
  prices to different customers (monopoly price
  discrimination).

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1. A monopoly is a one firm industry
2. Examples Microsoft (Windows operating
system) Local electric
department Local gas
company 3. Basic Features of Monopoly .
There is only one firm in the industry- with a
significant market power
i.e. ability to influence price (a price maker
or setter) . Its products do not have
close substitutes . Entry into the monopoly
market is restricted by a number of
barriers
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4. Barriers to entry into monopoly market

• A key resource is owned by a single firm(DeBeers
  Diamond monopoly)

• The government gives a single firm the exclusive
  right to produce some good or
  service- copy rights

• The cost of production makes a single producer
  more efficient than a large number of producers.

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5. The demand for a monopolist is downward
slopinggt if the monopolist
wants sell more quantity, it has to reduce price.

• The monopolist is a price searcher i.e. price
  that maximizes profit

• The monopolist doesnt necessarily charge the
  highest price

• For the monopolist, PriceARDgtMR
• Why is Price gt MR for a monopolist?
• It is because the monopolist has to reduce
  the price it
• charges for every additional unit it sells.
• This price cut reduces the additional revenue
  on each
• additional unit it sells.

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Monopolys Total ,Average, and Marginal Revenue
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6. The short run price and output decisions for a
monopolist
a. The profit making case Price gt ATC
b. The break-even case Price ATC
c. Loss minimization by staying in business
AVCltPriceltATC
d. Loss minimization by going out of business
PriceAVC
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7. In the long-run, the monopolist may make
profit or just break-even. Why is the
monopolist able to make profit in the long-run?
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8a. Monopoly Price Discrimination The goal
is to maximize profits legally. . is the
business practice of selling the same good or
service at different prices to different
customer group
b. Examples .A 10 discount for faculty at
the book store .Airline fares for personal
and business travelers .Quantity
discounts(rates on residential and commercial
electricity) .Movie ticket for children
and adults .In-state vs. out of tuition
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c. Conditions which make the price
discrimination practice successful

• No arbitrage- no buying at low price and selling
  at high price

• The monopolist should be able to separate the
  market according to the price elasticity of
  demand i.e. charge a lower price in a market with
  elastic demand and a higher price in a market
  with less elastic demand.

d. Price -output decisions are made where
MR1MR2...MRNMC See Graph.
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9a. A regulated or natural monopoly . is
a firm which makes its own production decisions
subject to rate (price) regulation.
b. Examples . Local cable company
. Local electric department . Local gas
company
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c. Forms of monopoly regulation
1) Average cost-pricing or fair return pricing
- the monopolist is required to charge a rate
which is just sufficient to cover the per unit
cost of production Price ATC gt
most common form because the regulatory
agency does not
have to worry about bailing out the monopolist
if it fails.
2)Marginal-cost pricing or socially optimal
pricing- the monopolist is required to charge a
rate which is only sufficient to cover the
marginal cost of production. Price
MC gt not very popular because the regulatory
agency may be required to bail out the monopolist
if it fails i.e. price lt ATC
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10) The Performance of Monopoly

• Consumers pay higher price for goods and
  services than in a competitive market

• Monopoly output is smaller than a competitive
  firms output

• Inefficiency in resource allocation is evident
  in monopoly as implied by monopoly price gt MC
  .