F&D P2: Monopoly

What is a Monopoly?

A market structure where the firm is the only seller of a good or service that has no close substitutes. It has complete barriers to entry/exit and imperfect information.

What is a Perfect Monopoly (Pure Monopoly)?

Controls 100% of the market in a product (strict definition).

What is a Monopoly (Broader Definition)?

Controls a significantly smaller market share than 100% but is a dominant firm.

Why can only a small number of firms operate profitably in a monopoly market?

MES is very large relative to market demand.

What is Price Setting Ability?

Ability of firms to set prices, or mark up above MC. Monopoly is a price setter.

What is the effect of having no close substitutes? (Monopoly Characteristic)

Gives the monopoly greater price-setting ability; its demand is relatively less price elastic.

What is Imperfect Knowledge? (Monopoly Characteristic)

Sellers and buyers have incomplete information (e.g., production methods, prices, quality) -> increases monopolist's price-setting ability.

How do Monopoly Characteristics Affect Pricing and Output Decisions?

The monopolist is a price setter; its demand (AR) curve is downward sloping and MR curve also slopes downwards, with MR < AR (Price).

What is the Profit-maximising Condition of Monopoly?

Monopoly is in equilibrium at the output level where MR=MC and MC is rising.

What types of profits can a profit-maximising monopolist make in the Short Run?

Supernormal, normal, or subnormal profits.

What is the Long Run Equilibrium for a Profit-Maximising Monopolist?

It is possible for the monopolist to retain its supernormal profits due to high barriers to entry. LRMC = MR and TR >= TC.

What is a Natural Monopoly? (Alternative Definition)

Results from high capital outlay in some markets where LRAC falls continually over entire market demand, enabling incumbent to exploit significant IEOS.