Monopoly Structure: Monopoly

2. Monopoly Structure: Monopoly • Market power is the ability to alter the price of a good or service. • A monopoly is one firm that produces the entire market supply of a particular good or service. • Since there is only one firm in a monopoly industry, the firm is the industry. LO-1

3. Monopoly = Industry • The firm’s demand curve is identical to the market demand curve for the product. • Market demand is the total quantity of a good or service people are willing and able to buy at alternative prices in a given time period. LO-1

4. Price versus Marginal Revenue • Marginal revenue (MR) is the change in total revenue that results from a one-unit increase in quantity sold. • Price equals marginal revenue only for perfectly competitive firms. • Marginal revenue is always less than price for a monopolist. LO-1

5. Price versus Marginal Revenue • A monopolist can sell additional output only if it reduces prices. • The MR curve lies below the demand curve at every point but the first. LO-2

6. Figure 7.1

7. Profit Maximization • The monopolist uses the profit-maximization rule to determine its rate of output. • According to the rule, a monopolist maximizes profit at the rate of output where MR = MC. LO-3

8. Profit Maximization • The profit maximization rule applies to all firms: • A perfectly competitive firm produces the quantity where MC = MR (= p) • A monopolist produces the quantity where MC = MR (< p) LO-3

9. Figure 7.2

10. The Monopoly Price • The intersection of the marginal revenue and marginal cost curves establishes the profit-maximizing rate of output. • The demand curve tells us the highest price consumers are willing to pay for that specific quantity of output. • Only one price is compatible with the profit-maximizing rate of output. LO-3

11. Monopoly Profits • Total profit equals profit per unit times the number of units produced. • Profit per unit = price minus average total cost Profit per unit = p – ATC • Total profit = profit per unit times quantity Total profit = (p – ATC) x q LO-3

12. Monopoly versus Competitive Outcomes • A monopolist produces less and charges a higher price than would a competitive industry. LO-4

13. Figure 7.3

14. Barriers to Entry • Obstacles that make it difficult or impossible for would-be producers to enter a particular market. • Examples include patents, legal harassment, exclusive licensing, bundled products, and government franchises. LO-4

15. Competition versus Monopoly • In competition, as well as in monopoly, high prices and profits signal consumers’ demand for more output. • In competition, the high profits attract new suppliers. • In monopoly, barriers to entry are erected to exclude potential competition. LO-4

16. Competition versus Monopoly • In competition, production and supplies expand, and prices slide down the market demand curve. • In monopoly, production and supplies are constrained, and prices don’t move down the market demand curve. LO-4

17. Competition versus Monopoly • In competition, a new equilibrium is established, and average costs of production approach their minimum. • In monopoly, no new equilibrium is established, and average costs are not necessarily at or near a minimum. LO-4

18. Competition versus Monopoly • In competition, economic profits approach zero, and price equals marginal cost throughout the process. • In monopoly, economic profits are at a maximum, and price exceeds marginal cost at all times. LO-4

19. Competition versus Monopoly • In competition, the profit squeeze pressures firms to reduce costs or improve product quality. • In monopoly, there is no profit squeeze to pressure the firm to reduce costs or improve product quality. LO-4

20. Competition versus Monopoly

21. Near Monopolies • In duopoly two firms together produce the industry output. • In oligopoly several firms dominate the market. • In monopolistic competition many firms each have a monopoly on its own brand image but must still contend with competing brands. LO-4

22. Redeeming Qualities of Monopolies? Monopolies could also benefit society. We must consider: • Research and Development • Entrepreneurial Incentives • Economies of Scale • Natural Monopolies • Contestable Markets • Structure versus behavior LO-5