Monopoly Economics: Market Power, Revenue, and Policy

Monopoly

A monopoly is a single seller of a product with no close substitutes.

Price Maker

Because they are the only seller, they are a price maker (they choose price).

Monopoly Resources

One firm controls a key resource.

Example of Monopoly Resources

Diamond company controls diamond mines.

Government Regulation

Gov gives exclusive right.

Examples of Government Regulation

Patents, copyrights.

Natural Monopoly

One firm can serve entire market at lower cost.

Examples of Natural Monopoly

Utility companies (electricity, water).

Price Power in Monopoly

Price maker.

Price Power in Perfect Competition

Price taker.

Demand Curve in Monopoly

Downward sloping.

Demand Curve in Perfect Competition

Horizontal at market price.

Relationship between Price & Marginal Revenue in Monopoly

MR < P.

Relationship between Price & Marginal Revenue in Perfect Competition

MR = P.

Output Effect

Selling more → revenue increases.

Price Effect

Lowering price → revenue falls on all units.

Marginal Revenue (MR)

MR < Price (P).

Profit Maximization Rule for Monopoly

Produce where MR = MC.

Charging Price in Monopoly

Charge price from demand curve at that quantity.

Deadweight Loss

Lost total surplus because output is restricted.

Price Discrimination

Selling the same good at different prices to different customers.

Requirements for Price Discrimination

Ability to separate customers by willingness to pay; No resale allowed.

Examples of Price Discrimination

Student and senior discounts, Airline pricing, Matinee movie pricing, Coupons.

Perfect Price Discrimination

Consumer surplus becomes zero; Producer takes all the surplus.

Antitrust Laws

Break up or block monopolies.

Examples of Antitrust Laws

Sherman Act, Clayton Act.

Public Ownership

Government runs the firm.

Example of Public Ownership

U.S. Postal Service.

Do Nothing Policy

If fixing it may cause more harm.