Chapter 15 Monopoly Why Monopolies Arise Monopoly firm that is the sole seller of a product without close substitutes Barriers to entry o Monopoly resources A key resource required for production is owned by a single firm o Government regulation The government gives a single firm the exclusive right to produce some good or o The production process A single firm can produce output at a lower cost than can a larger number of service producers Natural monopoly arises b c 1 firm can supply an entire market at a smaller cost than could 2 firms How Monopolies Make Production and Pricing Decisions A monopolist s marginal revenue is always less than the price of its good Average revenue always equals the price of the good Marginal revenue for monopolies is very different from marginal revenue for competitive firms When a monopoly increases the amount it sells this action has two effects on total revenue P Q o The output effect More output is sold so Q is higher which tends to increase total revenue o The price effect The price falls so P is lower which tends to decrease total revenue Total Revenue Q x P profit total cost In competitive markets price equals marginal cost In monopolized markets price exceeds marginal cost The Deadweight Loss Socially efficient quantity is found where the demand curve and the marginal cost curve intersect Price Discrimination Single price monopoly firm sells each unit for the same price to all customers Price discrimination selling the same good at different prices to different customers Moral 1 o Price discrimination is a rational strategy for a profit maximizing monopolist o By charging different prices to different customers a monopolist can increase its profit o Price discriminating monopolist charges each customer a price closer to his or her willingness to pay therefore selling more than is possible with a single price o Price discrimination requires the ability to separate customers according to their willingness to pay o Monopolists choose differences such as age or income to distinguish among customers Moral 2 Moral 3 o Price discrimination can raise economic welfare by avoiding deadweight loss Analytics of Price Discrimination each customer a different price Perfect price discrimination monopolist knows exactly the willingness to pay of each customer and can charge
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