Chapter 11: Monopoly Notes

Chapter 11: Monopoly

Pure Monopoly Characteristics

• Number of sellers: One
• Product: Can be homogeneous or differentiated.
• Price control: Price maker (controls the price).
• Entry: Blocked entry.
• Competition: Primarily non-price competition.

Near-Monopolies Examples

Examples of near-monopolies include:

• Facebook
• Microsoft
• Intel
• Google
• Amazon
• Nvidia
• Western Union
• De Beers
• Professional sports teams
• Airline service in small towns

Why Monopolies Exist: Barriers to Entry

Monopolies exist because barriers to entry prevent other firms from entering the industry. Barriers to entry:

• are factors that prohibit firms from entering an industry.

Examples of Barriers to Entry

1. Economies of scale: Significant economies of scale may lead to a natural monopoly.
2. Legal barriers to entry: Patents and licenses.
3. Ownership of essential resources: Control over crucial resources.
4. Pricing and other strategic barriers to entry: Predatory pricing.

Economies of Scale

• When economies of scale are extensive, market demand might not support numerous competing firms, each producing at the minimum efficient scale.
• A single natural monopoly can achieve the lowest long-run average total cost.

Bonus Point 130

A monopoly is most likely to emerge and be sustained when economies of scale are large relative to market demand.

Legal Barriers to Entry

1. Patents: Exclusive right of an inventor to use or allow others to use their invention.
   • Purpose of patents: Incentivize innovation by granting temporary monopoly power.
   • Examples: Pharmaceutical drugs(exclusive rights to manufacture and sell the drug), technological inventions.
2. Licenses: Government-issued limitations on industry entry.
   • Examples: Liquor licenses, tobacco licenses, broadcasting licenses.

Historical Monopoly Examples

• Standard Oil
• De Beers (diamonds)
• Alcoa (aluminum)

Pricing and Other Strategic Barriers to Entry

• Predatory Pricing: Selling a product at a very low price to drive competitors out of the market.
  • Examples:
    • Walmart selling certain items below cost to eliminate local stores.
    • NWA (Northwest Airlines) reducing ticket prices to push Spirit Airlines out of business.

Bonus Points on Barriers to Entry

• Barriers to entry can result from government regulation.
• Barriers to entry are the basis for monopoly.

Monopoly Demand

• The demand curve facing a monopolist is the market demand curve.
• The market demand curve is downward sloping.
• A monopolist is a price maker.
• To sell more, the monopolist must lower the price.

Revenue and Demand Schedule

Marginal Revenue in Monopoly

• Marginal revenue (MR) is the additional revenue from selling one more unit.
• The slope of MR is twice the slope of the demand curve.
• MR is less than price in monopoly.
• MR is equal to price in pure competition.

Profit-Maximizing Rule

Profit-maximizing rule for unregulated monopolist: Produce where marginal revenue (MR) equals marginal cost (MC).

Bonus Point 134

The profit-maximizing monopolist will set its price where MR=MC.

Bonus Point 135

Total revenue for a profit-maximizing monopolist will be price times quantity ( P
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egmedspace Q ).

Bonus Point 136

Profit for a profit-maximizing monopolist will be total revenue minus total cost ( ( TR - TC) ). ( JM
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Additional Notes

• Economic profit can be sustained in the long run for a monopolist due to blocked entry.
• Economic profit is zero in the long run for a purely competitive firm.
• No monopoly supply curve exists because monopolists do not have a supply curve that is independent of demand.
• Profit-maximizing price is not necessarily the highest possible price. It is where MR = MC.
• A monopolist can face a loss if demand is low or costs are high.

Monopolist Facing a Loss

A monopolist may face a loss if demand decreases or ATC increases such that there is a loss per unit.

Bonus Point 137

A profit-maximizing monopolist facing a loss should continue producing to minimize losses if price is greater than average variable cost.

Pure Competition vs. Pure Monopoly

Comparison

Given the same costs and demand:

• Monopoly price ( Pm ) > Competitive price ( Pc )
• Monopoly quantity ( Qm ) < Competitive quantity ( Qc )

Cost Differences

Costs for pure competition and monopoly often differ due to:

• Economies of scale (due to high fixed costs, network effects)
• X-inefficiency (organizational slack in monopolies)
• Rent-seeking expenditures (spending to maintain monopoly power, like lobbying)
• Technological advance (can be faster or slower in monopolies depending on incentives)