Monopoly and How It Arises
A monopoly is a market:
That produces a good or service for which no close substitute exists
In which there is one supplier that is protected from competition by a
barrier preventing the entry of new firms.
How Monopoly Arises
A monopoly has two key features:
No close substitutes
Barriers to entry
No Close Substitute
If a good has a close substitute, even if it is produced by only one firm, that firm
effectively faces competition from the producers of the substitute.
A monopoly sells a good that has no close substitutes
Barriers to Entry
A constraint that protects a firm from potential competitors are called barriers to entry.
Three types of barriers to entry are
Natural Barriers to Entry
Natural barriers to entry create natural
A natural monopoly is an industry in which
economies of scale enable one firm to supply
the entire market at the lowest possible cost.
Figure 13.1 illustrates a natural monopoly.
One firm can produce
4 millions units of output at 5 cents per unit.
Two firms can produce
4 million units—2 units each—at 10 cents per
In a natural monopoly, economies of scale are so
powerful that they are still being achieved even
when the entire market demand is met.
The LRAC curve is still sloping downward when
Ownership Barriers to Entry An ownership barrier to entry occurs if one firm owns a significant portion of a key
During the last century, De Beers owner 90 percent of the world’s diamonds.
Legal Barriers to Entry
Legal barriers to entry create a legal monopoly.
A legal monopoly is a market in which competition and entry are restricted by the
granting of a
Public franchise (like the Canada Post, a public franchise to deliver
Government licence (like a licence to practise law or medicine)
Patent or copyright
Monopoly PriceSetting Strategies
For a monopoly firm to determine the quantity it sells, it must choose the appropriate
There are two types of monopoly pricesetting strategies:
A singleprice monopoly is a firm that must sell each unit of its output for the same price
to all its customers.
Price discrimination is the practice of selling different units of a good or service for
A SinglePrice Monopoly’s Output and Price Decision
Price and Marginal Revenue
A monopoly is a price setter, not a price taker like a firm in perfect competition.
However, that does not imply that a monopolist can charge any price that he/she wants.
The reason is that the market demand that he faces is downward sloping.
To sell a larger output, a monopoly must set a lower price
Total revenue, TR, is the price, P, multiplied by the quantity sold, Q.
Marginal revenue, MR, is the change in total revenue that results from a oneunit increase
in the quantity sold.
For a singleprice monopoly, marginal revenue is less than price at each level of output.