Chapter 14

• Definition of Monopoly

  A firm that is the sole seller of a product without close substitutes.
• Market Power

  The ability of a firm to influence the market price of its product, limited by consumer demand.
• Example of Key Resource Monopoly

  DeBeers' monopoly on diamonds in the 1980s.

  + Microsoft in operating systems
• Government-Created Monopoly

  Exclusive rights granted by the government, such as Sweden's monopoly on alcohol retail.
• Natural Monopoly

  A market where a single firm can supply a good/service more efficiently than multiple firms due to economies of scale.
• Demand Curve for Monopoly

  Downward-sloping, indicating that higher prices lead to lower quantity demanded.
• Profit Maximization for Monopoly

  Occurs where marginal revenue (MR) equals marginal cost (MC).
• Deadweight Loss (DWL)


  The loss of total surplus due to monopoly pricing and reduced output compared to competitive markets.
• Perfect Price Discrimination

  Charging each customer their exact willingness to pay, capturing all consumer surplus.
• Group Price Discrimination

  Differentiating prices based on observable traits like student discounts or airline pricing.
• Welfare Effects of Price Discrimination

  Can increase total surplus by capturing more consumer surplus, though it may still lead to inequities.
• Public Policy Tools for Monopolies

  Regulation, anti-trust laws, price controls, and breakups to manage or dismantle monopolies.
• Revenue Effects on Monopolies

  Total revenue affected by output (increase revenue) and price effects (decrease revenue)
• The monopoly price is higher than marginal cost, leading to reduced output compared to competitive markets.
• Consumer Surplus (CS)

  The difference between what a consumer is willing to pay and what they paid for the product.
• Producer Surplus (PS)


  The difference between the market price and the lowest price a producer is willing to accept to produce a good.
• Regulation and Anti-trust Laws

  To curb the negative impacts of monopolies and promote competitive markets.
• Price Controls and Breakups

  Tools used by governments to manage or dismantle monopolies.
• If a monopoly raises the price, consumers will buy less.
• If a monopoly reduces the quantity of output it sells, the price per unit of output increases.
• A monopoly's marginal revenue is always lower than the price of the good. (Graphically: MR curve lower than demand curve)
• When a monopoly increases the amount it sells, this has two effects on total revenue:

  1. Output effects → Q is higher → tends to increase TR
  2. Price effects → P is lower → tends to decrease TR
• Profit Maximisation for a Monopoly:

  A) Average total cost

  B) Demand

  C) Marginal Revenue

  D) Marginal Cost

  E) Monopoly Price

  F) profit maximising quantity

  
• The intersection of the marginal-revenue curve and the marginal-cost curve determines the profit-maximising quantity and then the demand curve show the price consistent with this quantity.
• Monopoly firm produces Q

  $P>MR=$$MC$
• Competitive firm produces Q

  $P=$$MR=$$MC$