MANAGERIAL ECONOMICS 11th Edition

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Chapter 9
Monopoly and Monopsony
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Key Concepts

• monopoly
• price maker
• Barriers to entry
• deadweight loss
• natural monopoly
• patent
• monopsony
• Price discrimination
• bilateral monopoly
• antitrust law

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Overview

• ?. Definition and features of monopoly
• ?.Barriers to entry
• ?.Profit Maximization
• ?.Social Costs of Monopoly
• ?.Social Benefits From Monopoly
• ?.Monopoly Regulation
• ?. Antitrust Policy

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Learning objectives

• Why some markets have only one seller.
• How a monopoly determines the quantity to produce
  and the price to charge.
• How the monopolys decisions affect economic
  well-being.
• The various public policies aimed at solving the
  problem of monopoly.
• Why monopolies try to charge different prices to
  different customers.

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?. Definition and Features of monopoly

• Definition

monopoly exists when a single firm is the sole
producer of a product for which there are no
close substitutes.
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Why monopolies arise?
No! Stop!!!

• barriers to entry

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Control of inputs

• De Beers

Diamonds are forever
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Economies of scale

• natural monopoly when a single firm can supply a
  good or service to an entire market at a smaller
  cost than could two or more firms.

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Figure Economies of Scale as a Cause of Monopoly
Cost
Quantity of Output
0
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Patents or license

• Governments may restrict entry by giving a single
  firm the exclusive right to sell a particular
  good in certain markets.

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A safety coffin
contact lenses
Can you imagine putting contact lenses on one
million chickens and checking them every week to
see if theyre still there?
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?.Profit Maximization in Monopoly Markets

• To review Perfect competition

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Figure Demand Curves for Competitive and
Monopoly Firms
(a) A Competitive Firm

s Demand Curve
(b) A Monopolist

s Demand Curve
Price
Price
Quantity of Output
0
Quantity of Output
0
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To fill in the blanks to draw demand, MR, AR
and TR curve
P Q TR AR MR
6 0 0
5 1 5 5 5
4 2 8 4 3
3 3 9 3 1
2 4 8 2 -1
1 5 5 1 -3
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Steps to determine profit-maximizing output,
price, and economic profit

• Step 1. MRMC ?optimal Q
• Step 2. vertical line to the demand curve
• ? optimal P
• Step 3. Economic profit
• Method 1 (P- ATC) Q
• Method 2 PQ?ATCQ

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?. Social Costs of Monopoly

• Monopoly Underproduction
• too little output.
• too high prices
• Deadweight Loss
• a loss in social welfare
• a wealth transfer problem

consumer surplus
producer surplus
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Figure welfare in competitive market
Price
0
Quantity
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Monopoly versus perfect competition
Price
Pcm
Quantity
0
Efficient
quantity
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Competitive market equilibrium

• Qs-404P? P100.25Qs
• Qd170-2P? P85-0.5Qd
• QdQs
• Solution
• Pe35 Qe100

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Figure Consumer and Producer Surplus in the
Market Equilibrium
Price
0
Quantity
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Monopoly

• Qs-404P? P100.25Qs
• Qd170-2P? P85-0.5Qd
• P85-0.5Qd ?TR85Q-0.5Q
• ?MR85-Q
• MRMC
• 85-Q100.25Q
• ?Qm60
• Pm85-0.5Q55

2
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Figure monopoly output and price
Price
Pm55
Qm60
0
Quantity
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Figure monopoly versus perfect competition
Price
Pm55
A
35
B
D
25
C
Qm60
0
Quantity
100
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• Consumer Deadweight loss
• 1/2(55-35)(100-60) 400
• Producer deadweight loss
• ½( 30-25) (100-60)200
• Wealth transfer to producer
• (55-35) 60

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?.Social Benefits From Monopoly

• Economies of Scale/natural monopoly
• Invention and Innovation

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?. Monopoly Regulation

• Dilemma of Natural Monopoly
• Monopoly has the potential for efficiency.
• Unregulated monopoly can lead to economic profits
  and underproduction.

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(a) socially optimal (marginal-cost) pricing and
(b) fair-return (average-total-cost) pricing.
What is the dilemma of regulation?
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• Antitrust laws give government various ways to
  promote competition.
• They allow government to prevent mergers.
• They allow government to break up companies.
• They prevent companies from performing activities
  that make markets less competitive.

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Two Important Antitrust Laws

• Sherman Antitrust Act (1890)
• Sherman Act forbids restraints of trade and
  monopolizing.
• Clayton Act (1914)
• Clayton Act focuses on mergers, interlocking
  directorates, price discrimination, and tying
  contracts.

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bundling charge Internet software Windows
operating system
Microsoft Case
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True or false

• The sole producer of a good can charge whatever
  price it wants.
• For monopoly to exist, entry barriers must exist.
• When a demand curve slopes down, marginal revenue
  is always less than price.
• Marginal revenue equals zero when the demand
  curve has an elasticity of one.
• Monopolies always earn economic profits.
• For the same demand and cost conditions, price is
  higher and output is lower under monopoly than
  under perfect competition.