MONOPOLY• Defining Characteristics• Market Size: single firm• Market Power: significant• Product Differentiation: unique• Barriers to Entry: effective• Long Run Economic Profits (“Super Profits”): likely• Significant market power…• …and governed by profit maximization• So: MC = MR • Profit Maximizing Rule• We assume all firms maximize profit• General Rule: MC = MR• Perfect Competition Rule: MC = MR = P• Thinking about marginal revenue…• Perfect competition• Firms are “price-takers”…• price doesn’t change…• therefore…• MR = P• Monopoly• Firms are “price-makers”• price depends on quantity• therefore….• MR ≠ PIn Search of Marginal Revenue….∆TR / ∆QPrice Quantity Total Revenue Marginal Revenue90 10 900 n/a (not ZERO)80 20 1600 7070 30 2100 5060 40 2400 3050 50 2500 10•• MR is disconnected from price• MR drops twice as fast as demand• If we continued the next MR would be negativeMarginal Revenue GraphMonopoly Market StructureQ* at MR = MCP* on the demand curve, go up from where MR = MC to demand curve and go straight acrossTR = q* times p*TC = where q* is at ATCProfit = the box formed by TR and
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