Download Monopolistic firms can increase sales by reducing the price. As the

Monopolistic firms can increase sales by reducing the price. As the price declines and sales increase, total revenue rises to a
maximum point and then it falls with further price cuts.
The rule for maximizing profits is to produce the quantity at
which total revenue is rising at the same rate as total cost. For
this firm, as output is increased up to about 300 units, total
revenue is rising more rapidly than total cost for each
additional unit produced and profits are getting larger. Up to
this point costs increase at a diminishing rate—the TC
curve rises less steeply—because of an increase in plant efficiency. But as output exceeds the most efficient production
level of the plant and equipment, total costs rise more rapidly.
Beyond an output level of 300 units, total revenue is not rising
as fast as total cost and profits are shrinking, as shown by
the narrowing difference between TR and TC in Figure 10.
At more than 340 units of output (the upper break-even point)
costs exceed revenue and profits become negative.
The increase in total revenue from producing one more
unit is called marginal revenue (MR). The increase in total
cost from producing that one additional unit is marginal cost
(MC). The output level at which revenue and cost are increasing at the same rate (MR = MC) is the maximum profit
level of output.
Shared monopoly Single-firm monopolies like De Beers are
rare, but there are many industries in which the market is
controlled by only a few firms. According to the most common measurement, any industry in which four firms or less
account for over 50% of industry sales is considered a shared
monopoly. If there is a formal agreement among the firms
regarding pricing and/or dividing up the market, the group
marginal revenue the addition to total
revenue from the sale of an additional unit
of output.
marginal cost the addition to total cost
from the production of an additional unit of
output.
shared monopoly an industry in which
there are only a few firms; more specifically, an industry in which four or fewer
firms account for more than 50% of industry sales.
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A firm maximizes profits when it produces the quantity where total revenue exceeds total cost by the greatest amount. At this
output marginal revenue equals marginal cost (MR = MC).
cartel an industry in which the firms
have an agreement to set prices and/or
divide the market among members of the
cartel.
oligopoly a shared monopoly in which
there is no explicit agreement among the
firms.
homogeneous products identical
products produced by different firms.
differentiated products similar but not
identical products produced by different
firms.
price leadership a common practice in
shared monopoly industries by which one
of the firms in the industry, normally one
of the largest, changes its prices, and the
other firms follow its lead.
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of firms is called a cartel. OPEC is a prominent example of a
cartel. If there is no formal agreement among the firms, the
industry is called an oligopoly. Many industries in this
country are oligopolistic, including the steel, aluminum,
cigarette, metal can, and automobile industries. The steel and
aluminum industries produce homogeneous products, while
the cigarette and automobile industries produce differentiated
products.
As in pure monopolies, above-normal profit returns in
shared monopoly industries can be maintained over the long
run by restricting output. Because it is difficult or impossible
for new competitors to enter the industry, there is no increase
in supply to lower the price. The fewer the number of firms
in the industry, the easier it is for them to maintain maximum
monopoly profits.
It benefits the firms in a shared monopoly to cooperate
and produce the quantity and charge the prices that a pure
monopolist would. But where there is no formal agreement
among the firms in the industry, and sometimes even when
there is, this cooperation is difficult to sustain because of the
desire of each firm to get a larger share of the market. This
was the problem OPEC had in attempting to maintain high
Petroleum prices. (See chapter 3, Case Application, "OPEC
Takes a Lesson in Demand and Supply," p. 70.)
The danger of a price war among the different firms is a
threat to profits in a shared monopoly. As a result, we frequently see a practice of price leadership in this type of in-