Monopoly: a market containing a single firm.
Monopolist: a firm that is the only seller in a market.
10.1 A Single-Price Monopolist
Unlike a perfectly competitive firm, a monopolist faces a negatively sloped
Since the demand curve shows the price of the product, D curve = AR curve.
The monopolist’s MR is less than the price at which it sells its output. Thus
the monopolist’s MR curve is below its demand curve.
Two forces act on TR when decreasing price to sell more units:
o The loss in revenue resulting from the decrease in price on the initial
units (amount of the price reduction X number of initial units).
o The added revenue resulting from increased sales (current price X
change in quantity).
When MR > 0, η > 1.
When MR < 0, η < 1.
A profit-maximizing firm will always produce on the elastic portion of its
demand curve (more precisely where MR = MC).
Nothing guarantees that a monopolist will make positive profits in the short
run, but if it suffers persistent losses, it will eventually go out of business.
A monopolist does not have a supply curve because it is not a price taker; it
chooses its profit-maximizing price-quantity combination from among the
possible combinations on the market demand curve.
The level of output in a monopolized industry is less than the level of output
that would be produced if the industry were instead made up of many price-
taking firms. A monopolist restricts output below the competitive level and thus reduces
the amount of economic surplus generated in the market. The monopolist
therefore creates an inefficient market outcome.
If monopoly profits are to persist in the long run, the entry of new firms into
the industry must be prevented.
Entry barrier: any barrier to the entry of new firms into an industry. An entry
barrier may be natural or created.
Minimum efficient scale (MES): the smallest-size firm that can reap all the
economies of large-scale production (LRAC minimum).
Natural entry barriers:
o Natural monopoly: an industry characterized by economies of scale
sufficiently large that only one firm can cover its costs while
producing at its MES.
o Setup cost: costs faced by a new firm are so large that entry would be
Created entry barriers:
o Patents: prevent entry by conferring on the patent holder the sole
legal right to produce a particular product for a specific period of time.
o A charter or a franchise that prohibits competition by law (i.e. Canada
Post has a government-sanctioned monopoly on the delivery of first-
o Threat or sabotage (i.e. setting unsustainably low prices on new
In competitive industries, profits attract entry, and entry erodes profits. In
monopolized industries, positive profits can persist as long as there are
effective entry barriers.
A monopolist’s entry barriers are often circumvented by the innovation of
production processes and the development of new goods and services. Such
innovation explains why monopolies rarely persist over long periods, except
those that are protected through government charter or regulation.
Creative destruction: coined by Joseph Schumpeter referring to the process
by which a new product replaces an old product.
Since creative destruction thrives on innovation, the existence of monopoly
profits is a major incentive to economic growth.
10.2 Cartels as Monopolies
Cartel: an organization of producers who agree to act as a single seller in
order to maximize joint profits.
The members agree among themselves to restrict their total output to the
level that maximizes their joint profits.
Does not necessarily mean that ALL firms within an industry will be
The profit-maximizing cartelization of a competitive industry will reduce
output and raise price from the perfectly competitive levels. Cartels tend to be unstable because of the incentive for individual firms to
violate the output restrictions needed to sustain the joint-profit-maximizing
Cartels must also be able to limit the entry of new firms if their cartels are to
o Some cartels are able to issue licences and thus can choose to allow
new firms into the market.
o Certain industries have government imposed quotas and if the quotas
are allocated among existing producers, new firms cannot enter.
10.3 Price Discrimination
Price discrimination: the sale by one firm of different units of a commodity at
two or more different prices for reasons not associated with dif