Monopoly

When does monopoly occur?

Monopoly occurs when there is one large seller of a particular good or service. There is no competition whatsoever in a monopoly.

Few firms are pure monopolists in the real world. This often results from regulation.

However, we can find near-examples such as Amazon, Google, and Facebook.

What is market concentration?

Market concentration describes the degree to which a small number of firms dominate a market.

High market concentration often results in reduced competition.

Describe the market structure of monoploy

Number of sellers = one large seller

Barriers to entry = high

Product substitutability = differentiated

Explain a firm’s revenue

A firm’s revenue is: R = pq

A firm’s marginal revenue, MR, is the change in its revenue from selling one more unit. MR = DR / Dq

If the firm sells exactly one more unit,

Dq = 1, its marginal revenue is MR DR .

We know that for a competitive firm, MR = ΔTR = P* - does this hold for a monopolist?

Explain how marginal revenue and price differs from a competitive firm

The marginal revenue of a monopoly differs from that of a competitive firm because the monopoly faces a downward-sloping demand curve unlike the competitive firm.

Thus, the monopoly’s marginal revenue curve lies below the demand curve at every positive quantity.

For a competitive firm, P=MR (both are represented by a horizontal line).

For a monopoly, P>MR (represented by two separate downward-sloping lines).

How do you derive the marginal revenue curve as a function of P?

Decompose the change in TR due to selling one more unit into 2 parts:

1) For a monopoly to increase its output by ΔQ, the monopoly lowers its price per unit by (the slope of the demand curve).

By lowering its price, the monopoly loses: (change in p/change in Q) x Q

on the Q units it originally sold at the higher price,

 

2) But it earns an additional p on the extra output.

 Thus, the monopoly’s marginal revenue is: MR = p + change in p/change in Q x Q

Demand curve slopes downward

Delta P/Delta Q < 0

The second term of the RHS < 0

MR<P

What is PED?

Basic def: PED measures the percentage change in quantity demanded in response to a percentage change in price.

2nd method: Transformed formula: two components: