Microeconomics: Monopoly

15 Monopoly
PRINCIPLES OF
MICROECONOMICS
FOURTH EDITION
N. G R E G O R Y M A N K I W
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by Ron Cronovich
2008 update
© 2008 South-Western, a part of Cengage Learning, all rights reserved
In this chapter, look for the answers to

these questions:
§ Why do monopolies arise?
§ Why is MR < P for a monopolist?
§ How do monopolies choose their P and Q?
§ How do monopolies affect society’s well-being?
§ What can the government do about monopolies?
§ What is price discrimination?
CHAPTER 15 MONOPOLY 1
Introduction
§ A monopoly is a firm that is the sole seller of
§ In this chapter, we study monopoly and contrast

it with perfect competition.
§ The key difference:
A monopoly firm
Why Monopolies Arise
The main cause of monopolies is
Three sources of barriers to entry:

1.
E.g., DeBeers owns most of the world’s
diamond mines
2.
E.g., patents, copyright laws

Why Monopolies Arise

3. Natural monopoly:
Example: 1000 homes

need electricity. Cost Electricity
ATC slopes
downward due
to huge FC and
$80 small MC
$50 ATC
Q
500 1000
Monopoly vs. Competition: Demand Curves

In a competitive market,
the market demand curve
slopes downward.
A competitive firm’s
but the demand curve demand curve
for any individual firm’s P
product is
The firm can increase Q D

without lowering P,
Monopoly vs. Competition: Demand Curves
A monopolist is the only

seller, so
A monopolist’s
demand curve
P
To sell a larger Q,
D
Q
A C T I V E L E A R N I N G 1:
A monopoly’
monopoly’s revenue
Moonbucks is
Q P TR AR MR
the only seller of
cappuccinos in town. 0 $4.50 n.a.
The table shows the 1 4.00
market demand for
2 3.50
cappuccinos.
3 3.00
Fill in the missing
spaces of the table. 4 2.50
What is the relation 5 2.00
between P and AR?
6 1.50
Between P and MR?
7
Moonbuck’s D and MR Curves
P, MR
$5
4
Demand curve (P)
3
2
1
0
-1 MR
-2
-3
0 1 2 3 4 5 6 7 Q
Understanding the Monopolist’s MR
§ Increasing Q has two effects on revenue:
• The output effect:
• The price effect:
§ To sell a larger Q, the monopolist must
§ Hence,
§ MR could even be negative if the price effect
exceeds the output effect
(e.g., when Moonbucks increases Q from 5 to 6).
Profit-Maximization
§ Like a competitive firm, a monopolist maximizes
profit by
§ Once the monopolist identifies this quantity,
Profit-Maximization
Costs and
Revenue MC
D
MR
Quantity
The Monopolist’s Profit
Costs and
Revenue MC
As with a ATC
competitive firm,
the monopolist’s
profit equals D
MR
Quantity
A Monopoly Does Not Have an S Curve

A competitive firm
A monopoly firm
So there is no supply curve for monopoly.

Case Study: Monopoly vs. Generic Drugs
Patents on new drugs The market for

Price a typical drug
give a temporary
monopoly to the seller.
MC
D
MR
Quantity
The Welfare Cost of Monopoly
§ Recall: In a competitive market equilibrium,
§ In the monopoly eq’m, P > MR = MC

•
• The monopoly Q is too low –
• Thus, monopoly results in

The Welfare Cost of Monopoly

Competitive eq’m:
Price
quantity = QC MC
P = MC
total surplus is
maximized
Monopoly eq’m:
D
MR
QC Quantity
Public Policy Toward Monopolies

§ Increasing competition with antitrust laws
• ban some anticompetitive practices,
allow govt to break up monopolies
• e.g.,
§ Regulation
• Govt agencies set the monopolist’s price
• For natural monopolies,
• If so, regulators might subsidize the monopolist

or set P = ATC for zero economic profit.
Public Policy Toward Monopolies
§ Public ownership
• Example: U.S. Postal Service
• Problem:
§ Doing nothing
• The foregoing policies all have drawbacks,
so the best policy may be no policy.
Price Discrimination
§ Discrimination: treating people differently based
on some characteristic, e.g. race or gender.
§ Price discrimination:
§ The characteristic used in price discrimination
Perfect Price Discrimination vs.

Single Price Monopoly
Here, the monopolist
Price
charges the same
price (PM) to all
buyers. PM
MC
D
MR
QM Quantity
Perfect Price Discrimination vs.
Single Price Monopoly
Here, the monopolist
Price
This is called perfect

price discrimination. MC
D
MR
Quantity
Price Discrimination in the Real World

§ In the real world, perfect price discrimination is
not possible:
•
• buyers do not announce it to sellers

§ So, firms divide customers into groups
based on
Examples of Price Discrimination

Movie tickets
Airline prices
Discount coupons
Need-based financial aid

Quantity discounts
CONCLUSION: The Prevalence of Monopoly

§ In the real world, pure monopoly is rare.
§ Yet, many firms have market power, due to
§ In many such cases, most of the results from

this chapter apply, including

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15 Monopoly

Premium PowerPoint® Slides

In this chapter, look for the answers to

§ In this chapter, we study monopoly and contrast

Three sources of barriers to entry:

E.g., patents, copyright laws

Why Monopolies Arise

Example: 1000 homes

Monopoly vs. Competition: Demand Curves

The firm can increase Q D

A monopolist is the only

Moonbuck’s D and MR Curves

• The price effect:

§ To sell a larger Q, the monopolist must

§ Once the monopolist identifies this quantity,

A Monopoly Does Not Have an S Curve

So there is no supply curve for monopoly.

Case Study: Monopoly vs. Generic Drugs

Patents on new drugs The market for

§ In the monopoly eq’m, P > MR = MC

• The monopoly Q is too low –

• Thus, monopoly results in

The Welfare Cost of Monopoly

Public Policy Toward Monopolies

• If so, regulators might subsidize the monopolist

§ The characteristic used in price discrimination

Perfect Price Discrimination vs.

This is called perfect

Price Discrimination in the Real World

• buyers do not announce it to sellers

Examples of Price Discrimination

Need-based financial aid

Examples of Price Discrimination

CONCLUSION: The Prevalence of Monopoly

§ In many such cases, most of the results from

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