Chapter 16 - Monopoly

Market power

The ability of a monopolist to raise its selling price above the competitive level by reducing output 

Under perfect competition:

There are many buyers and sellers, standardized product, and free entry and exit

Monopolist

a firm that is the only producer of a good with no close substitutes

Market power

the ability of a firm to raise prices

Profits will not persist in the long run unless there is a 

barrier to entry

Barriers to entry

generate profit for the monopolist in the short-run and long-run

Barriers to entry can take the form of:

controlling natural resources or inputs, increasing returns to scale, technological superiority, network externalities, and government-made barriers

Increasing returns to scale

a natural monopoly exists when increasing returns to scale provide a large cost advantage to a single firm

Technological superiority

A firm that maintains a consistent technological advantage over potential competitors can establish itself as a monopolist

Network externality

the value of a good or service to an individual increasing as others use the same good or service

Patent

gives an inventor a temporary monopoly in the use or sale of an invention

copyright

gives the creator of a literary or artistic work sole rights to profit from that work

All firms face the same rule: profit is maximized at the Q where

MR = MC

Quantity effect

one more unit is sold, increasing total revenue by the price at which the unit is sold

Price effect:

to sell the last unit, the monopolist must cut the market price on all units sold which decreases total revenue

Profit maximization consists of two steps

Choosing a quantity and choosing a price

In order to find the profit-maximizing quantity of output for a monopolist, you look for the point where the MR curve ________ the MC curve

crosses

Monopolists don’t have supply curves since

they control prices

Monopoly profit comes at the ______ expense

consumers

To avoid deadweight loss,

government policy attempts to prevent monopoly behavior

antitrust policy

government policies used to prevent or eliminate monopolies

Natural Monopolies

bring lower costs but with no guarantee the firm will voluntarily pass along its cost savings to consumers

Public (government) ownership

publicly owned companies are often poorly run

Price regulation

A price ceiling imposed on a monopolist does not create shortages if it is not set too low.