Monopoly
Chapter 15
Monopoly
While a competitive firm is a price taker,a
monopoly firm is a price maker.
A firm is considered a monopoly if,,,
– it is the sole seller of its product.
– its product does not have close substitutes.
Why Monopoly Arise
The fundamental cause of monopoly is
barriers to entry.
Barriers to entry have three sources:
– Ownership of a key resource.
– The government gives a single firm the
exclusive right to produce some good.
– Costs of production make a single producer
more efficient than a large number of
producers.
Monopoly Resources
Although exclusive ownership of a key
resource is a potential source of monopoly,
in practice monopolies rarely arise for this
reason.
Government-Created Monopolies
Governments may restrict entry by giving
a single firm the exclusive right to sell a
particular good in certain markets,
Patent and copyright laws are two
important examples of how government
creates a monopoly to serve the public
interest.
Natural Monopoly
An industry is a natural monopoly when a
single firm can supply a good or service to
an entire market at a smaller cost than
could two or more firms.
A natural monopoly arises when there are
economies of scale over the relevant range
of output.
Average
total cost
Quantity of Output
Cost
0
Economies of Scale
as a Cause of Monopoly...
Monopoly versus Competition
Monopoly
– Is the sole producer
– Has a downward-sloping demand curve
– Is a price maker
– Reduces price to increase sales
Competitive Firm
– Is one of many producers
– Has a horizontal demand curve
– Is a price taker
– Sells as much or as little at same price
Demand
Quantity of
Output
(a) A Competitive Firm’s
Demand Curve
(b) A Monopolist’s
Demand Curve
0
Price
0 Quantity of
Output
Price
Demand
Demand Curves for
Competitive and Monopoly Firms
A Monopoly’s Revenue
Total Revenue
P x Q = TR
Average Revenue
TR/Q = AR = P
Marginal Revenue
DTR/DQ = MR
Quantity
(Q)
Price
(P)
Total Revenue
(TR=PxQ)
Average
Revenue
(AR=TR/Q)
Marginal Revenue
(MR= )
0 $11.00 $0.00
1 $10.00 $10.00 $10.00 $10.00
2 $9.00 $18.00 $9.00 $8.00
3 $8.00 $24.00 $8.00 $6.00
4 $7.00 $28.00 $7.00 $4.00
5 $6.00 $30.00 $6.00 $2.00
6 $5.00 $30.00 $5.00 $0.00
7 $4.00 $28.00 $4.00 -$2.00
8 $3.00 $24.00 $3.00 -$4.00
QTR DD /
A Monopoly’s Total,Average,
and Marginal Revenue
A Monopoly’s Marginal Revenue
A monopolist’s marginal revenue is always less
than the price of its good.
– The demand curve is downward sloping.
– When a monopoly drops the price to sell one more
unit,the revenue received from previously sold units
also decreases.
When a monopoly increases the amount it sells,
it has two effects on total revenue (P x Q).
– The output effect—more output is sold,so Q is higher.
– The price effect—price falls,so P is lower.
Quantity of Water
Price
$11
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
1 2 3 4 5 6 7 8
Marginal
revenue
Demand
(average revenue)
Demand and Marginal Revenue
Curves for a Monopoly...
Profit Maximization of a Monopoly
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.
Monopoly
price
QuantityQMAX0
Costs and
Revenue
Demand
Average total cost
Marginal revenue
Marginal
cost
A
1,The intersection of
the marginal-revenue
curve and the marginal-
cost curve determines
the profit-maximizing
quantity...B
2.,..and then the demand
curve shows the price
consistent with this
quantity.
Profit-Maximization
for a Monopoly...
Comparing Monopoly and
Competition
For a competitive firm,price equals
marginal cost.
P = MR = MC
For a monopoly firm,price exceeds
marginal cost.
P > MR = MC
A Monopoly’s Profit
Profit equals total revenue minus total
costs.
Profit = TR - TC
Profit = (TR/Q - TC/Q) x Q
Profit = (P - ATC) x Q
Quantity0
Costs and
Revenue
Demand
Marginal cost
Marginal revenue
QMAX
BMonopoly
price
E
Average
total cost D
Average total cost
C
The Monopolist’s Profit
The Monopolist’s Profit
The monopolist will receive economic
profits as long as price is greater than
average total cost.
Costs and
Revenue
Price
during
patent life
Price after
patent
expires
Monopoly
quantity
Competitive
quantity
0 Quantity
Demand
Marginal
cost
Marginal
revenue
The Market for Drugs...
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.
Price
0 Quantity
Marginal cost
Demand
(value to buyers)
Efficient
quantity
Cost to
monopolist
Value to
buyers
Value to
buyers
Cost to
monopolist
Value to buyers is greater
than cost to seller.
Value to buyers is less than
cost to seller.
The Efficient Level of Output...
The Deadweight Loss
Because a monopoly sets its price above
marginal cost,it places a wedge between
the consumer’s willingness to pay and the
producer’s cost.
This wedge causes the quantity sold to fall
short of the social optimum.
Quantity0
DemandMarginalrevenue
Marginal cost
Monopolyprice
Deadweightloss
Efficient
quantity
Monopoly
quantity
Price
The Inefficiency of Monopoly
The Inefficiency of Monopoly
The monopolist produces less than the
socially efficient quantity of output.
The Deadweight Loss
The deadweight loss caused by a
monopoly is similar to the deadweight
loss caused by a tax.
The difference between the two cases is
that the government gets the revenue from
a tax,whereas a private firm gets the
monopoly profit.
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.
Increasing Competition
with Antitrust Laws
Antitrust laws are a collection of statutes
aimed at curbing monopoly power.
Antitrust laws give government various
ways to promote competition.
– They allow government to prevent mergers.
– They allow government to break up
companies.
– They prevent companies from performing
activities which make markets less
competitive.
Two Important Antitrust Laws
Sherman Antitrust Act (1890)
– Reduced the market power of the large and
powerful,trusts” of that time period.
Clayton Act (1914)
– Strengthened the government’s powers and
authorized private lawsuits.
Regulation
Government may regulate the prices that
the monopoly charges.
The allocation of resources will be efficient
if price is set to equal marginal cost.
Regulated
price
Quantity0
Loss
Price
Demand
Marginal cost
Average total costAveragetotal cost
Marginal-Cost Pricing for a
Natural Monopoly
Regulation
In practice,regulators will allow
monopolists to keep some of the benefits
from lower costs in the form of higher
profit,a practice that requires some
departure from marginal-cost pricing.
Public Ownership
Rather than regulating a natural
monopoly that is run by a private firm,the
government can run the monopoly itself,
(e.g,in the U.S.,the government runs the
Postal Service).
Doing Nothing
Government can do nothing at all if the
market failure is deemed small compared
to the imperfections of public policies.
Price Discrimination
Price discrimination is the 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,
Price discrimination is not possible when a
good is sold in a competitive market since
there are many firms all selling at the
market price,In order to price discriminate,
the firm must have some market power.
Perfect Price Discrimination
Perfect price discrimination refers to the
situation when the monopolist knows
exactly the willingness to pay of each
customer and can charge each customer a
different price.
Price Discrimination
Two important effects of price
discrimination:
It can increase the monopolist’s profits.
It can reduce deadweight loss.
Deadweight
loss
Consumer
surplus
Price
0 Quantity
Profit
Demand
Marginal cost
Marginal
revenue
Quantity sold
Monopoly
price
(a) Monopolist with Single Price
Welfare Without Price
Discrimination
Price
0 Quantity
Demand
Marginal cost
Quantity sold
(b) Monopolist with Perfect Price Discrimination
Profit
Welfare With Price
Discrimination
Examples of Price Discrimination
Movie tickets
Airline prices
Discount coupons
Financial aid
Quantity discounts
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.
Summary
A monopoly is a firm that is the sole seller
in its market.
It faces a downward-sloping demand
curve for its product.
A monopoly’s marginal revenue is always
below the price of its good.
Summary
Like a competitive firm,a monopoly
maximizes profit by producing the
quantity at which marginal cost and
marginal revenue are equal.
Unlike a competitive firm,its price
exceeds its marginal revenue,so its price
exceeds marginal cost,
Summary
A monopolist’s profit-maximizing level of
output is below the level that maximizes
the sum of consumer and producer
surplus.
A monopoly causes deadweight losses
similar to the deadweight losses caused by
taxes.
Summary
Policymakers can respond to the
inefficiencies of monopoly behavior with
antitrust laws,regulation of prices,or by
turning the monopoly into a government-
run enterprise,
If the market failure is deemed small,
policymakers may decide to do nothing at
all.
Summary
Monopolists can raise their profits by
charging different prices to different
buyers based on their willingness to pay,
Price discrimination can raise economic
welfare and lessen deadweight losses.
Exercise #15
Problems and applications
– #2,#9,#10,#15
经济学可以更有趣
为什么独立音乐人支持音乐免费下载，而成名艺人却坚决反对？
为什么家用电器零售商会在炉具和冰箱上敲出凹痕？
为什么黑色的苹果机（索尼相机）比白色的更贵？
为什么购买音乐会套票要便宜的多?
为什么 DVD会分区而 CD不会？
经济学可以更有趣
思考：为什么会有三元（十元）店的存在？
为什么衣服按款式定价而不是按型号定价？
Chapter 15
Monopoly
While a competitive firm is a price taker,a
monopoly firm is a price maker.
A firm is considered a monopoly if,,,
– it is the sole seller of its product.
– its product does not have close substitutes.
Why Monopoly Arise
The fundamental cause of monopoly is
barriers to entry.
Barriers to entry have three sources:
– Ownership of a key resource.
– The government gives a single firm the
exclusive right to produce some good.
– Costs of production make a single producer
more efficient than a large number of
producers.
Monopoly Resources
Although exclusive ownership of a key
resource is a potential source of monopoly,
in practice monopolies rarely arise for this
reason.
Government-Created Monopolies
Governments may restrict entry by giving
a single firm the exclusive right to sell a
particular good in certain markets,
Patent and copyright laws are two
important examples of how government
creates a monopoly to serve the public
interest.
Natural Monopoly
An industry is a natural monopoly when a
single firm can supply a good or service to
an entire market at a smaller cost than
could two or more firms.
A natural monopoly arises when there are
economies of scale over the relevant range
of output.
Average
total cost
Quantity of Output
Cost
0
Economies of Scale
as a Cause of Monopoly...
Monopoly versus Competition
Monopoly
– Is the sole producer
– Has a downward-sloping demand curve
– Is a price maker
– Reduces price to increase sales
Competitive Firm
– Is one of many producers
– Has a horizontal demand curve
– Is a price taker
– Sells as much or as little at same price
Demand
Quantity of
Output
(a) A Competitive Firm’s
Demand Curve
(b) A Monopolist’s
Demand Curve
0
Price
0 Quantity of
Output
Price
Demand
Demand Curves for
Competitive and Monopoly Firms
A Monopoly’s Revenue
Total Revenue
P x Q = TR
Average Revenue
TR/Q = AR = P
Marginal Revenue
DTR/DQ = MR
Quantity
(Q)
Price
(P)
Total Revenue
(TR=PxQ)
Average
Revenue
(AR=TR/Q)
Marginal Revenue
(MR= )
0 $11.00 $0.00
1 $10.00 $10.00 $10.00 $10.00
2 $9.00 $18.00 $9.00 $8.00
3 $8.00 $24.00 $8.00 $6.00
4 $7.00 $28.00 $7.00 $4.00
5 $6.00 $30.00 $6.00 $2.00
6 $5.00 $30.00 $5.00 $0.00
7 $4.00 $28.00 $4.00 -$2.00
8 $3.00 $24.00 $3.00 -$4.00
QTR DD /
A Monopoly’s Total,Average,
and Marginal Revenue
A Monopoly’s Marginal Revenue
A monopolist’s marginal revenue is always less
than the price of its good.
– The demand curve is downward sloping.
– When a monopoly drops the price to sell one more
unit,the revenue received from previously sold units
also decreases.
When a monopoly increases the amount it sells,
it has two effects on total revenue (P x Q).
– The output effect—more output is sold,so Q is higher.
– The price effect—price falls,so P is lower.
Quantity of Water
Price
$11
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
1 2 3 4 5 6 7 8
Marginal
revenue
Demand
(average revenue)
Demand and Marginal Revenue
Curves for a Monopoly...
Profit Maximization of a Monopoly
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.
Monopoly
price
QuantityQMAX0
Costs and
Revenue
Demand
Average total cost
Marginal revenue
Marginal
cost
A
1,The intersection of
the marginal-revenue
curve and the marginal-
cost curve determines
the profit-maximizing
quantity...B
2.,..and then the demand
curve shows the price
consistent with this
quantity.
Profit-Maximization
for a Monopoly...
Comparing Monopoly and
Competition
For a competitive firm,price equals
marginal cost.
P = MR = MC
For a monopoly firm,price exceeds
marginal cost.
P > MR = MC
A Monopoly’s Profit
Profit equals total revenue minus total
costs.
Profit = TR - TC
Profit = (TR/Q - TC/Q) x Q
Profit = (P - ATC) x Q
Quantity0
Costs and
Revenue
Demand
Marginal cost
Marginal revenue
QMAX
BMonopoly
price
E
Average
total cost D
Average total cost
C
The Monopolist’s Profit
The Monopolist’s Profit
The monopolist will receive economic
profits as long as price is greater than
average total cost.
Costs and
Revenue
Price
during
patent life
Price after
patent
expires
Monopoly
quantity
Competitive
quantity
0 Quantity
Demand
Marginal
cost
Marginal
revenue
The Market for Drugs...
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.
Price
0 Quantity
Marginal cost
Demand
(value to buyers)
Efficient
quantity
Cost to
monopolist
Value to
buyers
Value to
buyers
Cost to
monopolist
Value to buyers is greater
than cost to seller.
Value to buyers is less than
cost to seller.
The Efficient Level of Output...
The Deadweight Loss
Because a monopoly sets its price above
marginal cost,it places a wedge between
the consumer’s willingness to pay and the
producer’s cost.
This wedge causes the quantity sold to fall
short of the social optimum.
Quantity0
DemandMarginalrevenue
Marginal cost
Monopolyprice
Deadweightloss
Efficient
quantity
Monopoly
quantity
Price
The Inefficiency of Monopoly
The Inefficiency of Monopoly
The monopolist produces less than the
socially efficient quantity of output.
The Deadweight Loss
The deadweight loss caused by a
monopoly is similar to the deadweight
loss caused by a tax.
The difference between the two cases is
that the government gets the revenue from
a tax,whereas a private firm gets the
monopoly profit.
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.
Increasing Competition
with Antitrust Laws
Antitrust laws are a collection of statutes
aimed at curbing monopoly power.
Antitrust laws give government various
ways to promote competition.
– They allow government to prevent mergers.
– They allow government to break up
companies.
– They prevent companies from performing
activities which make markets less
competitive.
Two Important Antitrust Laws
Sherman Antitrust Act (1890)
– Reduced the market power of the large and
powerful,trusts” of that time period.
Clayton Act (1914)
– Strengthened the government’s powers and
authorized private lawsuits.
Regulation
Government may regulate the prices that
the monopoly charges.
The allocation of resources will be efficient
if price is set to equal marginal cost.
Regulated
price
Quantity0
Loss
Price
Demand
Marginal cost
Average total costAveragetotal cost
Marginal-Cost Pricing for a
Natural Monopoly
Regulation
In practice,regulators will allow
monopolists to keep some of the benefits
from lower costs in the form of higher
profit,a practice that requires some
departure from marginal-cost pricing.
Public Ownership
Rather than regulating a natural
monopoly that is run by a private firm,the
government can run the monopoly itself,
(e.g,in the U.S.,the government runs the
Postal Service).
Doing Nothing
Government can do nothing at all if the
market failure is deemed small compared
to the imperfections of public policies.
Price Discrimination
Price discrimination is the 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,
Price discrimination is not possible when a
good is sold in a competitive market since
there are many firms all selling at the
market price,In order to price discriminate,
the firm must have some market power.
Perfect Price Discrimination
Perfect price discrimination refers to the
situation when the monopolist knows
exactly the willingness to pay of each
customer and can charge each customer a
different price.
Price Discrimination
Two important effects of price
discrimination:
It can increase the monopolist’s profits.
It can reduce deadweight loss.
Deadweight
loss
Consumer
surplus
Price
0 Quantity
Profit
Demand
Marginal cost
Marginal
revenue
Quantity sold
Monopoly
price
(a) Monopolist with Single Price
Welfare Without Price
Discrimination
Price
0 Quantity
Demand
Marginal cost
Quantity sold
(b) Monopolist with Perfect Price Discrimination
Profit
Welfare With Price
Discrimination
Examples of Price Discrimination
Movie tickets
Airline prices
Discount coupons
Financial aid
Quantity discounts
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.
Summary
A monopoly is a firm that is the sole seller
in its market.
It faces a downward-sloping demand
curve for its product.
A monopoly’s marginal revenue is always
below the price of its good.
Summary
Like a competitive firm,a monopoly
maximizes profit by producing the
quantity at which marginal cost and
marginal revenue are equal.
Unlike a competitive firm,its price
exceeds its marginal revenue,so its price
exceeds marginal cost,
Summary
A monopolist’s profit-maximizing level of
output is below the level that maximizes
the sum of consumer and producer
surplus.
A monopoly causes deadweight losses
similar to the deadweight losses caused by
taxes.
Summary
Policymakers can respond to the
inefficiencies of monopoly behavior with
antitrust laws,regulation of prices,or by
turning the monopoly into a government-
run enterprise,
If the market failure is deemed small,
policymakers may decide to do nothing at
all.
Summary
Monopolists can raise their profits by
charging different prices to different
buyers based on their willingness to pay,
Price discrimination can raise economic
welfare and lessen deadweight losses.
Exercise #15
Problems and applications
– #2,#9,#10,#15
经济学可以更有趣
为什么独立音乐人支持音乐免费下载，而成名艺人却坚决反对？
为什么家用电器零售商会在炉具和冰箱上敲出凹痕？
为什么黑色的苹果机（索尼相机）比白色的更贵？
为什么购买音乐会套票要便宜的多?
为什么 DVD会分区而 CD不会？
经济学可以更有趣
思考：为什么会有三元（十元）店的存在？
为什么衣服按款式定价而不是按型号定价？
