Monopoly

• Monopoly

  One firm, one seller dominating the market
• Types of monopoly

  • Pure theoretical monopoly (one firm, 100% market share)
  • Monopoly power (one firm with >25% market share, legal monopoly)
• Monopoly

  • Differentiated products
  • High barriers to entry and exit
  • Imperfect information on market conditions
  • Profit maximiser
• Monopolist behaviour

  1. Downward sloping demand curve (average revenue)

  2. Marginal revenue twice as steep as demand curve

  3. Produce where MR=MC
• Monopolist produces at quantity q1

  • Price is p1 (read from demand curve)
  • Supernormal profit is the area between AR and AC at q1
• Monopolist is not allocatively efficient
• Monopolist is not productively efficient
• Monopolist may exhibit X-inefficiency
• Monopolist has potential for dynamic efficiency through reinvestment of supernormal profits