MONOPOLY CHARACTERISTICS One seller of a good or

MONOPOLY

CHARACTERISTICS ØOne seller of a good or service ØCompletely differentiated good ØNo close substitutes for the good ØBarriers to entry Ø Legal barriers (patents, licenses) Ø Economies of scale Ø Control over resources ØAll are characteristics of an unregulated monopoly

MONOPOLY DEMAND 1. Firm and market are the same 2. Downward sloping demand curve 3. In order to sell MORE a monopolist must lower prices 4. MR is also downward sloping as a result 5. MR will be located below demand 6. Monopolist can charge more than a PC firm but MUST follow the Law of Demand 7. Monopolist always operates in the ELASTIC portion of the demand curve

MC PM D QM MR

KEY GRAPH POINTS • Always produce where MC = MR • Profit maximizing!!!!! • Price is set based on demand curve NOT MC or MR • Unregulated monopolies can earn positive economic profits if P>ATC

Profit Earning MC ATC PM D QM MR

EFFICIENCY • Is a monopoly efficient? • NO! NO! • Monopolies violate both types of efficiency • Allocative efficiency: market produces a level of output where MC=MB (MC=D) • Productive efficiency: firms produce at lowest possible cost (P=ATC minimum) • Hint: Perfectly competitive firms are always efficient!

MC ATC PM Produce here for productive efficiency Produce here for allocative efficiency D QM MR

MC ATC PM Monopolies create deadweight loss DWL D QM MR

MONOPOLY TRICKS

PRICE DISCRIMINATION • Selling the same good at different prices to different people • To exist: • Must have monopoly power • Must be able to sort consumers into groups • Must be able to prevent RESALE between consumers • Examples: • • Age discounts at theatres Coupons Early order discounts Buying bulk gets cheaper unit price

• To prevent resale: • Immediate consumption of item • Tied to identity (airlines)

NATURAL MONOPOLIES

NATURAL MONOPOLY • Unique situation where 1 single firm is more efficient than having competition • Exists because of economies of scale • Costs to produce are so high that firms could never earn back if had to compete

REGULATED MONOPOLIES

REGULATION • Two types of regulation on monopolies: • Both intended to make firms more efficient and benefit consumers • Socially optimal: forces monopoly to act like a perfectly competitive firm • Must produce where P=MC • Creates allocative efficiency • Can create losses for monopoly • Fair return: • P=ATC • Courts state firms can not be forced to operate at losses

P Unregulated monopoly ATC PM PSO MC Fair Return Socially Optimal D QM MR Q