Monopoly

S&N, Ch. 9
Mw, Ch. 15
 Imperfect competition
• The real world is not perfectly competitive
– Most markets are dominated by a small number
of companies
• Computer operating systems - Microsoft
• Global market for airplanes – Boeing & Airbus
• American market for hamburgers – McDonalds, Burger
King, Wendy’s
• Individual sellers have some control over price
 Type of imperfect competition
• Monopoly – just one seller
• Oligopoly – a few sellers
• Monopolistic competition – large numbers of
sellers with differentiated products
 Barriers to entry
• Minimum economic size is a significant
fraction of the market size
• Natural monopoly
– Minimum economic size exceeds market size
• Key resource owned by a single firm
• Legal restrictions
– IPR (patents, copyright, trade marks, registered
designs), tariffs, quotas, entry restrictions
(universal service obligation)
 Barriers to entry (cont.)
• High cost of entry, e.g. large commercial
airplanes
• Advertising and Product differentiation
 Monopolist’s decision making
• A monopolist has sole access to a market
• It faces a downward sloping demand curve
• The monopolist can choose either price or
quantity to produce
• If it chooses the price for its product the
quantity sold is determined by the demand
curve
• Seeks profit maximation
Quantity (Q) Price (P) Total Revenue Average Marginal Revenue
(P×Q) Revenue (TR/Q) (MR=Δ(TR)/ΔQ)
0 11 0 -
10
1 10 10 10
8
2 9 18 9
6
3 8 24 8
4
4 7 28 7
2
5 6 30 6
0
6 5 30 5
-2
7 4 28 4
 Marginal revenue
• Marginal Revenue (MR)
– The change in revenue generated by the sale of an
additional unit
• With a downward sloping demand curve:
– Price must be reduced to sell more
– Initially revenue increases – marginal revenue is
positive (the demand curve is inelastic)
– Eventually revenue falls – marginal revenue is
negative (the demand curve is elastic)
 Profit maximisation
• Profit maximisation occurs when
Marginal Revenue (MR) = Marginal Cost (MC)
• The intersection of the MR and MC curves
determines the profit maximising quantity
• The demand curve then gives the profit
maximising price
• Profit = Price × Quantity – Total Cost
 Monopolist’s decisions
Cost and Revenue
2. Demand curve
gives Pmax
Marginal Cost

Pmax
1. MR=MC
determines Qmax
ATC
Demand =
Average
Revenue
Marginal Revenue
Qmax Quantity
 Next week
• Oligopoly
– S&N, Ch 10
– Mw, Ch 16