November 26, 2013
CHAPTER 13: Monopoly
• Monopoly: industry that produces a good or service for which no close substitute exists and
in which there is one supplier that is protected from competition by a barrier preventing the
entry of new firms.
o 2 key features:
No close substitutes
Barriers to entry
Legal (patent, licenses)
Natural (cost based)
o Price-setting strategies
Single-price 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 different prices
SinglePrice Monopoly’s Output & Price Decision
• Price and Marginal Revenue
o A monopoly is a price setter, not a price taker like a firm in perfect competition.
o The reason is that the demand curve for the monopoly’s output is the market
o To sell a larger output, a monopoly must set a lower price.
• Total revenue = price x quantity
• Marginal revenue = change in TR from one-unit increase in quantity sold
• For single-price monopoly, MR is less than price at each output level MR Pc.
• Compared to perfect competition, monopoly restricts output and charges a higher price.
• Efficiency comparison
o The demand curve is the MB curve and the competitive market supply curve is the
o So competitive equilibrium is efficient: MB = MC. ECON 1000