Characteristics of a monopoly

• Single Seller
• No Close Substitutes
• Price Maker
• Blocked Entry
• Nonprice Competition

Types of monopolies
• Pure Monopoly
• Regulated Monopoly
• Near Monopoly

Monopoly Demand
• Market demand is the firm’s demand
• Hence, demand curve for a monopoly is downward sloping
• Marginal revenue curve lies below demand curve i.e marginal revenue is less than
price(Why?)

Output and Price Determination

• As with perfect competition , MR=MC
• However since price for a monopoly is not equal to MR, How do we determine
price
• Once we have profit maximizing output level i.e where MR=MC, draw a vertical
line from that output level to demand curve to get price
• Refer to fig 24.4. Profit maximizing level of output is 5 (where MR=MC). Price
equals 125.
• Profit is shaded in area=Q(P-AC)
• Since there is no free entry, a monopoly can make supernormal profits since no
other firms will enter and erode them away.
• No monopoly supply curve

There is no monopoly supply curve since

• There is no unique price corresponding to any particular output level. This is due
to the fact that any particular marginal revenue curve can have any number of
corresponding demand curves

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 Misconceptions concerning monopoly pricing

• Not highest price: The monopolist will simply choose the price that corresponds
to the profit maximizing level of output on the demand curve
• Total, not unit profit: At the profit maximizing level of output, total profit is
maximized, no necessarily unit profit at that output level

Economic effects of monopoly

Price, output and efficiency:

• Productive efficiency: price=minimum average total cost
• Allocative efficiency: output at point where price=marginal cost
• With monopoly situation neither productive nor allocative efficiency is reached
• Barriers to entry allow price to be greater than minimum ATC
• Refer to fig 24.6. Allocative efficiency would be at Qc and Pc, while monopoly
production is at Qm and Pm. Monopoly results in lower output and higher price
than perfect competition

Income transfer:
From consumers to monopoly

Cost complications
• We said that assuming monopoly costs were the same as those for perfect
competition, monopoly results in lower output and higher price than perfect
competition
• However sometimes monopoly costs are not the same as those of a perfectly
competitive market structure. Why
• 1) Economies of scale
• 2) X-inefficiency: Monopolies might not produce a given output at its lowest
possible cost. See fig 24.7
• 3)Rent –seeking expenditures: Monopolies might incur extra costs trying to
establish themselves as a monopoly
• 4) Technological advance: Monopolies have less incentive than perfectly
competitive firms to spend money on R&D, in order to improve technology and
thus lower costs

Price Discrimination
When a monopoly charges a different price to different people
Conditions:
Monopoly power
Market segregation
No resale

Examples:

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Air tickets: economy class, business class, first class etc

Quantity discounts
• Fig 24.8 shows graphical portrayal of discriminating monopolist
• Demand curve=marginal revenue curve. Why?
• Note that the discriminating monopolist produces more output and earns a higher
profit, than a single price monopolist
• Some consumers pay more than the single price, others pay less

Regulated Monopoly
• Natural monopolies have been subject to rate regulation( price regulation) by
government (antimonopoly or competition policy)
• Government will force monopolies to charge the socially optimal price i.e p=mc
• Refer to fig 24.9. Profit maximizing level of output is Qm
• While the monopoly will want to charge Pm, government can force the monopoly
to charge Pr which is equal to mc
• If the monopoly has to charge Pr no matter what, in effect the monopoly demand
curve will become a horizontal line through Pr. The monopoly will then maximize
profits by producing output Qr
• Regulation makes monopoly more efficient by forcing it to produce more and
charge a lower price
• However, at Pr , the monopoly is not covering costs
• In a case like this, government will allow the monopoly to charge pf ( called the
fair-return price), since this is the point where costs will be covered and normal
profits earned