Monopoly Notes

* Announcements: Exam 3 review on 4/22 (Chapters 13, 14, 15). Exam 3 on 5/1 (12:30 class) and 5/2 (2:00pm class).

* Monopoly Definition: A firm that is the sole seller of a product without close substitutes, making it a price maker.

* Why Monopolies Arise:

* Barriers to entry

* Monopoly resources: A single firm owns a key resource.

* Government regulation: Government gives a single firm exclusive right (patents and copyrights).

* The production process: Natural monopoly where a single firm can supply the entire market at a lower cost than multiple firms due to economies of scale.

* Production and Pricing Decisions:

* Monopolies are price makers with a downward-sloping demand curve.

* Marginal revenue (MR) is less than price (P).

* Profit maximization: Produce where MR = MC and set price on the demand curve.

* P > MR = MC (Price exceeds marginal cost).

* Monopoly Profit: Profit = TR - TC = (P - ATC) * Q

* Welfare Cost of Monopolies:

* Deadweight loss from inefficiently low quantity of output.

* Patents can increase welfare.

* Price Discrimination: Selling the same good at different prices to different customers to increase profit. Perfect price discrimination charges each customer their willingness to pay.

* Public Policy Toward Monopolies:

* Antitrust laws (Sherman Antitrust Act, Clayton Antitrust Act) to increase competition and prevent mergers.

* Regulation: Regulate the behavior of monopolists, including price regulation (marginal-cost pricing).

* Public ownership.

* Key Takeaways:

* Monopolies are bad due to lack of competition, leading to lower quantity and welfare loss.

* Monopolies can incentivize creativity and technology through profit capture. Some monopolies, like utilities, require regulation.

* Oligopoly (Brief Review):

* A market dominated by a few firms.

* Game theory: How people behave in strategic situations.

* Duopolies can collude and form a cartel (illegal in the US) to act as a monopoly.

* Nash Equilibrium: A situation where neither firm has an incentive to deviate.

* Prisoner's Dilemma: Demonstrates why cooperation is difficult even when it is mutually beneficial.