Chapter 13 The Meaning of Monopoly A producer is a monopolist if it is the sole supplier of a good that has no close substitutes When a firm is a monopolist the industry is a monopoly What a monopolist does o A monopolist reduces the quantity supplied to QM monopoly quantity and moves up along the demand curve from C competitive market to M monopolistic market raising the price to PM monopoly price o Why do monopolies exist o How do they get away with this and protect their profit from new firms Profits will not persist in the long run unless there is a barrier to entry o Barriers to entry are essential for monopolies o Five principle types of barriers to entry Control of natural resources or inputs A monopolist that controls a resource or input crucial to an industry can prevent other firms from entering its market Ex diamond industry Increasing returns to scale A monopoly created and sustained by increasing returns to scale is called a natural monopoly Technological superiority A firm that maintains a consistent technological advantage over potential competitors can establish itself as a monopolist Ex Apple Windows etc Network externality The value of a good or service to an individual is greater when many others use the same good or service Ex facebook facebook wouldn t be fun if all of your friends didn t also use facebook Government made barriers including patents and copyrights A patent gives an inventor a temporary monopoly in the use or sale of an invention A copyright gives the creator of a literary or artistic work sole rights to profit from that work How a monopolist maximizes profit All firms face the same rule o Profit is maximized at the quantity where MR MC An increase in production by a monopolist has two opposing effects on revenue o Quantity effect one more unit is sold increasing total revenue by the price at which the unit is sold o Price effect to sell the last unit the monopolist must cut the market price on all units sold this decreases total revenue Profit maximization consists of two steps o Choosing a quantity choose where MR MC o Choosing a price once you ve picked your quantity follow the graph to the demand curve which shows you how much consumers will pay Monopoly Causes Inefficiency Monopoly and Public Policy Monopoly profit comes at consumers expense When a monopoly raises prices and lowers quantity consumer surplus falls and deadweight loss is created To avoid DWL government policy attempts to prevent monopoly behavior The government policies used to prevent or eliminate monopolies are known as anti trust policy Dealing with Natural Monopoly Natural monopolies bring lower costs o There is no guarantee the firm will voluntarily pass along its cost savings to consumers Public policy o Public government ownership but publicly owned companies are often poorly run o Price regulation a price ceiling is imposed on a monopolist and does not create shortages if it is not set too low Price Discrimination Single price monopolist offers its product to all consumers at the same price Price discrimination firms charge different prices to different consumers for the same good Examples of price discrimination o Airline ticket pricing o Early bird menu o Seasonal sales o Student discount As shown the area that is unshaded no profit is reduced when there are more price discriminations Perfect price discrimination o When perfect price discrimination can be employed a firm will charge each customer a different price the maximum price each is willing to pay o Under perfect price discrimination the firm captures ALL consumer surplus as profit o There is no deadweight loss o There is zero consumer surplus because it was all captured by the monopolist as profit each person constitutes their own chunk of the graph shown above because you got everyone there is an infinite number of prices and therefore at every single point on the line profit is made Oligopoly An oligopoly is a market that is dominated by a small number of firms Less competitive than perfect comp and monopolistic comp but more competitive than monopoly Cooperation between firms may be profitable but it is unstable and illegal in the US Collusion firms cooperating to raise each other s profits o The strongest form of collusion is a cartel where several producers agree to restrict output in order to increase their joint profits