Chapter 9

Monopoly and Monopsony

Key Concepts

monopoly price maker Barriers to entry deadweight loss natural monopoly patent monopsony Price discrimination bilateral monopoly antitrust law

Overview 一 . Definition and features of

monopoly 二 .Barriers to entry 三 .Profit Maximization 四 .Social Costs of Monopoly 五 .Social Benefits From Monopoly 六 .Monopoly Regulation 七 . Antitrust Policy

Learning objectives

Why some markets have only one seller. How a monopoly determines the quantity

to produce and the price to charge. How the monopoly’s decisions affect

economic well-being. The various public policies aimed at

solving the problem of monopoly. Why monopolies try to charge different

prices to different customers.

一 . Definition and Features of monopoly

Definition

monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes.

Features of monopoly

Sole seller

Unique product

Imperfect information

LR economic profits

Blocked entry

Why monopolies arise?

barriers to entryNo!

Stop!!!

二 .Entry barriers

Control of inputs

Patents

license

Economies of scale

Control of inputs

De Beers

Diamonds are forever

Economies of scale

natural monopoly: when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.

Figure Economies of Scale as a Cause of Monopoly

Quantity of Output

Averagetotalcost

0

Cost

Patents or license

Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets.

“Can you imagine putting

contact lenses on one

million chickens and

checking them every week to

see if they’re still there?”

cont

act l

ense

sA safety coffin

三 .Profit Maximization in Monopoly Markets

To review Perfect competition

Figure Demand Curves for Competitive and Monopoly Firms

Quantity of Output

Demand

(a) A Competitive Firm’s Demand Curve (b) A Monopolist’s Demand Curve

0

Price

Quantity of Output0

Price

Demand

P Q TR AR MR

6 0 0

5 1 5 5 5

4 2 8 4 3

3 3 9 3 1

2 4 8 2 -1

1 5 5 1 -3

To fill in the blanks; to draw demand, MR, AR and TR curve

Steps to determine profit-maximizing output, price, and economic profit

Step 1. MR=MC →optimal Q*

Step 2. vertical line to the demand curve → optimal P*

Step 3. Economic profit Method 1: (P- ATC) ×Q* Method 2: P*Q* ATC×Q*﹣

四 . Social Costs of Monopoly

Monopoly Underproduction too little output. too high prices

Deadweight Loss a loss in social welfare a wealth transfer problem

consumer surplus producer surplus

Figure welfare in competitive market

Producersurplus

Consumersurplus

Price

0 Quantity

Equilibriumprice

Equilibriumquantity

Supply

Demand

A

C

B

D

E

Quantity0

Price

Deadweightloss

DemandMarginalrevenue

Marginal cost

Efficientquantity

Pm

Monopolyquantity

Pcm

Monopoly versus perfect competition

Competitive market equilibrium

Qs=-40+4P→ P=10+0.25Qs Qd=170-2P→ P=85-0.5Qd Qd=Qs Solution: Pe=35 Qe=100

Figure Consumer and Producer Surplus in the Market Equilibrium

Price

0 Quantity

Pe=35

Qe=100

Supply

Demand

Monopoly:

Qs=-40+4P→ P=10+0.25Qs Qd=170-2P→ P=85-0.5Qd P=85-0.5Qd →TR=85Q-0.5Q ∴MR=85-Q MR=MC 85-Q=10+0.25Q ∴Qm=60 Pm=85-0.5Q=55

2

Figure monopoly output and price

Price

0 Quantity

Supply

Demand

Pm=55

Qm=60

Figure monopoly versus perfect competition

Price

0 Quantity

Supply

Demand

Pm=55

Qm=60

35

100

25

A

B

C

D

Consumer Deadweight loss: 1/2(55-35)(100-60) =400 Producer deadweight loss: ½( 30-25) (100-60)=200

Wealth transfer to producer: (55-35) ×60

六 .Social Benefits From Monopoly

Economies of Scale/natural monopoly

Invention and Innovation

七 . Monopoly Regulation

Dilemma of Natural Monopoly Monopoly has the potential for

efficiency. Unregulated monopoly can lead to

economic profits and underproduction.

(a) socially optimal (marginal‑cost) pricing and (b) fair‑return (average‑total‑cost) pricing. What is the “dilemma of regulation?”

Antitrust laws give government various ways to promote competition. They allow government to prevent

mergers. They allow government to break up

companies. They prevent companies from performing

activities that make markets less competitive.

Two Important Antitrust Laws

Sherman Antitrust Act (1890) Sherman Act forbids restraints of trade

and “monopolizing.”

Clayton Act (1914) Clayton Act focuses on mergers,

interlocking directorates, price discrimination, and tying contracts.

”bundling” charge Internet software Windows operating system

Microsoft Case

中华人民共和国反垄断法 2007.8.30 通过2008.8.1 施行

目　录　　第一章　总　则

　　第二章　垄断协议

　　第三章　滥用市场支配地位

　　第四章　经营者集中

　　第五章　滥用行政权力排除、限制竞争

　　第六章　对涉嫌垄断行为的调查

　　第七章　法律责任

　　第八章　附　则

True or false

The sole producer of a good can charge whatever price it wants.

For monopoly to exist, entry barriers must exist. When a demand curve slopes down, marginal

revenue is always less than price. Marginal revenue equals zero when the demand

curve has an elasticity of one. Monopolies always earn economic profits. For the same demand and cost conditions, price is

higher and output is lower under monopoly than under perfect competition.