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Economics:
Principles and Applications, 2e
by Robert E. Hall &
Marc Lieberman
Chapter 9:
Monopoly
What Is a Monopoly?
A monopoly firm is the only seller
of a good or service with no close
substitutes. The market in which
the monopoly firm operates is
called a monopoly market.
The Sources of
Monopoly
•Economies of Scale
•Control of Scarce Inputs
•Government-Enforced
Barriers
The Sources of
Monopoly
Natural Monopoly
A market in which, due to
economies of scale, one firm can
operate at lower average cost than
can two or more firms.
The Sources of
Monopoly
Patent
A temporary grant of
monopoly rights over a new
product or scientific discovery.
The Sources of
Monopoly
Copyright
A grant of exclusive rights to
sell a literary, musical, or
artistic work.
The Sources of
Monopoly
Government Franchise
A government-granted right
to be the sole seller of a
product or service.
Monopoly Goals and
Constraints
•Monopoly Price or Output
Decision
•Profit and Loss
Monopoly Goals and
Constraints
A monopolist, like any firm, strives to maximize
profit. And, like any firm, it faces constraints. For
any level of output it might produce, total cost is
determined by (1) its technology of production and
(2) the prices it must pay for its inputs. And for any
level of output it might produce, the maximum
price it can charge is determined by the market
demand curve for its product.
Monopoly Goals and
Constraints
When any firm--including a
monopoly--faces a downward-sloping
demand curve, marginal revenue is
less than the price of output.
Therefore, the marginal revenue
curve will lie below the demand
Equilibrium in
Monopoly Markets
•Short-Run Equilibrium
•Long-Run Equilibrium
•Comparing Monopoly to Perfect
Competition
•Why Monopolies Often Earn Zero
Economic Profit
Equilibrium in
Monopoly Markets
A privately owned monopoly suffering an
economic loss in the long run will exit
the industry, just as would any other
business firm. In the long run, therefore,
we should not find privately owned
monopolies suffering economic losses.
Equilibrium in
Monopoly Markets
Rent-Seeking Activity
Any costly action a firm
undertakes to establish or
maintain its monopoly status.
What Happens When
Things Change?
A monopolist will react to an increase in
demand by producing more output,
charging a higher price, and earning a
larger profit. It will react to a decrease in
demand by reducing output, lowering
price, and suffering a reduction in profit.
Price Discrimination
•Requirements for Price
Discrimination
•Effects of Price
Discrimination
Price Discrimination
Single-Price Monopoly
A monopoly firm that is
limited to charging the same
price for each unit of output
sold.
Price Discrimination
Price Discrimination
Charging different prices to
different customers for
reasons other than differences
in cost.
Price Discrimination
Requirements for Price Discrimination
•There must be a downward-sloping demand curve
for the firm’s output.
•The firm must be able to identify consumers
willing to pay more.
•The firm must be able to prevent low-price
customers from reselling to high-price customers.
Price Discrimination
Perfect Price Discrimination
Charging each customer the
most he or she would be
willing to pay for each unit
purchased.
The Decline of
Monopoly