Pure Monopoly

1. single-seller

   1. the D faced by this single firm = to the market D & is downward sloping

2. unique product or product with no close subs or heterogenous products

3. firm has no control on P (firm is a price maker)

4. entry of new firms is blocked

what are the characteristics of a pure monopoly?

1. legal barriers to entry

2. ownership or control of essential resources

3. economies of scale (most important barrier for oligopoly)

4. strategic barriers

what are the entry barriers for monopoly?

legal barriers to entry

patents and licenses

ownership or control of essential resources

if a single firm controls a major resource used in production that may eliminate other firms from entering this market

economies of scale

as the amount of output increases, unit cost of production decreases

natural monopoly

if economies of scale forces an industry to have only one firm

strategic barrier

sometimes firms may engage in different pricing or marketing strategies that may also reduce or eliminate other firms’ incentive to enter the market

(revenue schedule) TR

in pure monopoly, this is a bell-shaped curve; upward sloping in the elastic region and downward sloping in the inelastic region

(revenue schedule) MR

decreasing and is less than the P

(revenue schedule) AR

decreasing and is also equal to the P

to maximize revenue or profit

what is the monopoly firm’s goal?

when fixed costs are significant and variable costs are negligible; they find a point where MR = 0

when does monopoly maximize revenue? and how do they maximize revenue?

1. overall efficiency (total surplus) is not maximized

2. leads to efficiency loss or deadweight loss

what is efficiency like in a monopoly?

because P ≠ MC, since P > MC => under-allocation

why does monopoly lead to allocative inefficiency?

because P ≠ min ATC

why does monopoly lead to productive inefficiency?