Module 9: Monopoly

• A monopoly is a market with

  • One seller
  • Seller produces one product with no close substitutes
  • No other product can compete with the monopolist’s product
  • Strict barriers to entry

  The seller is, therefore, a price maker, that is, the seller has market power
• Price maker / market power

  • The firms can influence the market price by increasing or decreasing production
  • A monopoly firm has significant market power, allowing it to be a price setter by changing its output
• Sources of barriers to entry

  • Government patent or copyright
  • What the patent does:
  • Exclusive right to sell for a period of time → siya lang pwede magbenta nung product → encourage profits
  • Sometimes used to encourage research or creativity
  • A single firm owns or controls a key input
  • Sila lang nagcocontrol nung input na yun
  • E.g. US Alcoa for aluminum, deBeers for diamond mines
  • Natural monopoly
  • Firm with economies of scale: cheaper for one firm to produce all quantities
  • Isa lang pwede mag-operate, mahal kapag single cost pero if you produce more, bumababa cost
  • E .g. electricity transmission lines
• Profit Maximization for a Monopolist

  Key idea: the monopoly faces a market demand curve – downward slope (which is the firm’s own because they supply everything in the market)
• Revenue of a Monopolist

  • For a monopolist, P>MR (compared to P=MR in perfect competition)
  • To sell more, a monopolist lowers its price to all quantities (not just the marginal quantity)
  • Therefore, the marginal quantity will generate lower marginal revenue
• Public Policy Toward Monopolies

  • Because of the deadweight loss, the government sometimes undertakes the following:

  1. Do nothing

  • Government may exacerbate the problem (government failure)

  1. Government takeover

  • E.g. PhilPost

  1. Antitrust legislation

  • Prevent M&A (e.g. Uber and Grab)
  • Break up companies (AT&T)

  1. Regulation 

  • Government sets allowable price or quantity
  • E.g. MERALCO
• How do firms price discriminate?

  1. Geography – different selling prices in Metro Manila vs Provinces
  2. Age – senior citizens discount
  3. Day of the week – airline tickets on weekdays
  4. Income – discount vouchers, financial aid