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MONOPOLY
Asst. Prof. Dr. Serdar AYAN
Causes of Monopoly
 Legal
restrictions
 Patents
 Control of a scarce resources
 Deliberately-erected entry barriers.
- Technical superiority
- Economies of scale
Forms of Imperfect Competition and
Market Boundaries
Pure monopoly
An industry with a single firm that produces a
product for which there are no close substitutes
and in which significant barriers to entry prevent
other firms from entering the industry to compete
for profits.
Natural monopoly
An industry that realizes such large economies of
scale in producing its product that single-firm
production of that good or service is most efficient.
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Monopoly: Why?
 Natural
monopoly (increasing returns
to scale), e.g. utility companies
 Pure monopoly
– a patent; e.g. a new drug
– sole ownership of a resource; e.g.
a toll bridge
– formation of a cartel
Monopoly: Assumptions
 Many
buyers
 Only one seller i.e. not a price-taker
 (Homogeneous product ~ no close
substitute)
 Perfect knowledge
 Restricted entry (and possibly exit)
Price and Output Decisions in Pure Monopoly Markets
Demand in Monopoly Markets
 FIGURE 13.2 The Demand Curve Facing a Perfectly Competitive Firm Is Perfectly Elastic
Perfectly competitive firms are price-takers; they are small relative to the size of the market
and thus cannot influence market price. The implication is that the demand curve facing a
perfectly competitive firm is perfectly elastic. If the firm raises its price, it sells nothing and
there is no reason for the firm to lower its price if it can sell all it wants at P* = $5.
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Monopoly: Features
monopolist’s demand curve is
the (downward sloping) market
demand curve
 The
 The
monopolist can alter the market
price by adjusting its output level.
Monopoly: Market Behaviour
p(y)
Higher output y causes a
lower market price, p(y).
D
y=Q
Monopoly: Market Behaviour
At the profit-maximizing output level,
the slopes of the total revenue and
total cost curves are equal, i.e.
MR = MC
Monopoly: Market Behaviour
Suppose that the monopolist seeks to
maximize economic profit
  TR  TC
What output level maximizes profit?
TABLE 13.1 Marginal Revenue Facing a Monopolist
(1)
Quantity
(2)
Price
0
1
2
3
4
5
6
7
8
9
10
10
9
8
7
6
5
4
3
2
1
(3)
Total Revenue
(4)
Marginal
Revenue
0
-
$10
18
24
28
30
30
28
24
18
10
$10
8
6
4
2
0
-2
-4
-6
-8
Monopoly: Equilibrium
P
MR
Demand
y=Q
Monopoly: Equilibrium
MC
P
MR
Demand
y
Monopoly: Equilibrium
MC
P
ATC
MR
Demand
AR
y
Monopoly: Equilibrium
MC
P
Output
Decision
ATC
ym
MR
Demand
MC = MR
y
Monopoly: Equilibrium
MC
P
Pm = the
price
ATC
Pm
ym
MR
Demand y
Monopoly: Equilibrium
MC
P
ATC
Pm
ym
MR
The
shaded
area is
the
excess
profit
Demand y
Price and Output Decisions in Pure Monopoly Markets
The Monopolist’s Profit-Maximizing Price and Output
 FIGURE 13.5 Price and
Output Choice for a ProfitMaximizing Monopolist
A profit-maximizing
monopolist will raise
output as long as marginal
revenue exceeds marginal
cost. Maximum profit is at
an output of 4,000 units
per period and a price of
$4. Above 4,000 units of
output, marginal cost is
greater than marginal
revenue; increasing output
beyond 4,000 units would
reduce profit. At 4,000
units, TR = PmAQm0, TC =
CBQm0, and profit =
PmABC.
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