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

Economies of scale: Significant economies of scale may lead to a natural monopoly.
Legal barriers to entry: Patents and licenses.
Ownership of essential resources: Control over crucial resources.
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

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.
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

Price	Quantity	Total Revenue	Marginal Revenue
$11$	$0$	$0$
$10$	$1$	$10$	$10$
$9$	$2$	$18$	$8$
$8$	$3$	$24$	$6$
$7$	$4$	$28$	$4$
$6$	$5$	$30$	$2$
$5$	$6$	$30$	$0$
$4$	$7$	$28$	$-2$
$3$	$8$	$24$	$-4$
$2$	$9$	$18$	$-6$
$1$	$10$	$10$	$-8$
$0$	$0$	$0$

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
egmedspace colorbox{red}{}{x}
egmedspace Q ).

Bonus Point 136

Profit for a profit-maximizing monopolist will be total revenue minus total cost ( ( $TR - TC$ ) ). ( JM
egmedspace colorbox{red}{}{x} OV).

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 ( $P<em>m$ ) > Competitive price ( $P</em>c$ )
Monopoly quantity ( $Q<em>m$ ) < Competitive quantity ( $Q</em>c$ )

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)