Chapter 15 – Monopoly
A monopoly is
- One seller of a product
- Its product does not have close substitutes
- The firm is a price setter
The Three Sources of Barriers of Entry (That Create Monopolies)
1. A single firm owns a key resource that no other firm can access or has a close substitute for. In
reality this is rare because firms are big and international in scope.
2. The government gives one firm the exclusive right to produce and sell some good.
a. Patents, copyrights, etc.
3. The industry is a natural monopoly
a. Arises when it is cheaper for one company to produce a good than many.
b. Arises when there are economies of scale over the relevant range of output (downward
sloping part of the average total cost curve).
Since a monopoly is the only seller:
- Its demand curve IS the market demand curve.
- Downward sloping demand curve
- Note that a perfectly competitive firm has a horizontal demand curve (see chapter 14).
Revenue Relationships for a Monopoly: *Also note that because the demand curve is downward sloping, it has to lower P to increase Q sold.
Therefore marginal revenue is always lower than price.
Profit maximizing monopolists will always choose to produce a level of output such that:
Marginal revenue = marginal costs < P
*Note that the demand curve is essentially an average revenue curve (and can be treated as such).
Marginal Revenue also always bisects the origin and the x intercept of the average revenue curve.
Monopoly profit is derived as
Deadweight Loss Due to Monopoly
The monopoly charges a price > marginal costs.
Producer Surplus for a Monopoly
Producer Surplus = A +B.
Deadweight Loss = Green Triangle Ways the Government Gets Involved in Monopolies
Competition Law Legislation to prevent mergers that would make
the market less competitive.
Canada has the Competition Act.
Regulation Government agencies regulate the prices a
monopoly may charge.
Often, will set P = MC.
If this price means the monopoly would operate at
a loss and leave the market, the gov’t could