Managerial Economics

Managerial Economics

Thomas
Maurice

ninth edition

Monopoly

McGraw-Hill/Irwin
Managerial Economics,

Copyright 2008 by the McGraw-Hill Companies, Inc. All

Managerial Economics

Monopoly
Monopoly is a market in which single
seller sells a product which has no
close substitute
Pure Monopoly: no absolute
substitute
Monopoly: no close substitute

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Features of Monopoly
Single seller
Single product / service
No difference between firm and
industry
Independent decision making Price
Maker
Restricted Entry

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Reasons for Monopoly

Restricted by law
Govt. ownership

Control over key raw material

DeBeers

Specialized Know-how
IBM

Economies of Scale
Amul

Small Market size

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Types of Monopoly
Natural Monopoly
Defense

Legal Monopoly: Govt restrict entry

Patent, Intellectual Property Rights

Regional Monopoly
Possession of natural resources

Economic Monopoly
Microsoft

Managerial
Economics
Figure
1 Demand
Curves for Competitive and
Monopoly Firms

(a) A Competitive Firms Demand Curve

Price

(b) A Monopolists Demand Curve

Price

Demand

Demand

Quantity of Output

Quantity of Output

Copyright 2004 South-Western

Managerial
Table 1 Economics
A Monopolys Total, Average,

and Marginal Revenue

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Managerial Economics

A Monopolys Revenue
A Monopolys Marginal Revenue
When a monopoly increases the amount
it sells, it has two effects on total
revenue (P Q).
The output effectmore output is sold, so Q
is higher.
The price effectprice falls, so P is lower.

Managerial
Economics
Figure
3 Demand
and Marginal-Revenue Curves for
a Monopoly
Price
$11
10
9
8
7
6
5
4
3
2
1
0
1
2
3
4

Demand
(average
revenue)

Marginal
revenue
1

Quantity of Water

Copyright 2004 South-Western

Managerial Economics

Profit Maximization
A monopoly maximizes profit by
producing the quantity at which
marginal revenue equals marginal
cost.
It then uses the demand curve to find
the price that will induce consumers
to buy that quantity.
For normal profit, minimum Price
must equals average variable cost

Managerial Economics
Figure 4 Profit Maximization for a Monopoly
Costs and
Revenue

2. . . . and then the demand

curve shows the price
consistent with this quantity.
B

Monopoly
price

1. The intersection of the

marginal-revenue curve
and the marginal-cost
curve determines the
profit-maximizing
quantity . . .

Average total cost

A

Demand

Marginal
cost

Marginal revenue
0

QMAX

Quantity
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Managerial Economics

THE WELFARE COST OF MONOPOLY

In contrast to a competitive firm, the
monopoly charges a price above the
marginal cost.
From the standpoint of consumers,
this high price makes monopoly
undesirable.
However, from the standpoint of the
owners of the firm, the high price
makes monopoly very desirable.

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The Deadweight Loss

Because a monopoly sets its price
above marginal cost, it creates gap
between the consumers willingness
to pay and the producers cost.
This gap causes the quantity sold to fall
short of the social optimum.

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PUBLIC POLICY TOWARD

MONOPOLIES
Government responds to the problem
of monopoly in one of four ways.
Making monopolized industries more
competitive.
Regulating the behavior of monopolies.
Turning some private monopolies into
public enterprises.
Doing nothing at all.

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PRICE DISCRIMINATION
Price discrimination is the business
practice of selling the same good at
different prices to different
customers, even though the costs for
producing for the two customers are
the same.
Two important effects of price
discrimination:
It can increase the monopolists profits.
It can reduce deadweight loss.

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PRICE DISCRIMINATION
Examples of Price Discrimination
Movie tickets
Airline prices
Discount coupons
Financial aid
Quantity discounts

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CONCLUSION: THE PREVALENCE OF

MONOPOLY
How prevalent are the problems of
monopolies?
Monopolies are common.
Most firms have some control over their
prices because of differentiated
products.
Firms with substantial monopoly power
are rare.
Few goods are truly unique.