Monopolies: Sources and Impact

• A firm is a monopoly if it's the sole seller of its product and there are no close substitutes.
• Monopolies persist because other firms can't enter the market and compete.
• Barriers to entry arise from:
  • Control of a key resource.
  • Government grants of exclusive production rights.
  • Production costs that favor a single producer.
• Exclusive resource ownership rarely creates monopolies.
• Governments create monopolies through patents and copyrights to incentivize research and creativity.
• An industry is a natural monopoly when a single firm can supply the market at a lower cost than multiple firms.
• Natural monopolies occur with economies of scale over the relevant output range.
• Firms with continually declining average total costs are natural monopolies.

Monopoly vs. Competition

• Competitive firms are price takers, so revenue is proportional to quantity.
• Monopoly firms are price makers.

Demand Curves

• Competitive Firm: Horizontal demand curve. Price = MR. Increased quantity has no effect on price. Price taker
• Monopoly: Downward-sloping demand curve. Price > MR. Increased quantity reduces the price. Price maker

Monopoly Revenue

• Marginal revenue is always less than the good's price.
• The marginal revenue curve is below the demand curve.

Profit Maximization

• Monopolies maximize profit where marginal revenue (MR) equals marginal cost (MC).
• Use the demand cruve to find the price that induces consumers to buy the profit maximizing quantity

Profit Calculation

• Profit = Total Revenue (TR) - Total Cost (TC).
• Profit = (Price - Average Total Cost) x Quantity.

Inefficiency of Monopoly

• A monopoly price above marginal cost prevents some consumers who value the good from buying it.
• Monopoly production is below the efficient level.
• Deadweight loss is the area between the demand curve and the marginal cost curve.
• Deadweight loss occurs because the price is above marginal cost, reducing quantity below the social optimum.

Public Policy

• Antitrust Laws: Promote competition by preventing mergers, breaking up companies, and preventing anti-competitive acts.
• Regulation: Governments regulate monopolist behavior by setting Price = Marginal Cost.
• Public Ownership: The government can run a monopoly instead of regulating a private firm.
• Doing Nothing: Some economists argue that government intervention is often unnecessary.

Price Discrimination

• Price discrimination involves selling the same good at different prices to different customers.
• Monopolists can increase profit by charging different prices.
• Perfect price discrimination: Monopolist charges each customer their exact willingness to pay, capturing all the surplus and achieving efficiency. All consumers who value the good more than marginal cost buy it.
• Movie tickets, airline prices, discount coupons, financial aid, and quantity discounts exemplify price discrimination.

Monopoly Prevalence

• True monopolies are rare, but firms with significant monopoly power are common.