16 - Monopoly#
16.1 - Why Monopolies Arise#
A firm is a monopoly if it is the sole soller of a product that doesn’t have close substitutes. The fundamental cause of monopoly is barriers to entry, which have three main sources:
Monopoly resources: A signle firm owns a key resource required for production.
Government regulation: The government gives a single firm the exclusive right to produce a good or service.
The production process: A single firm can produce output at a lower cost than a larger number of firms can.
A natrual monopoly is a type of monopoly that arises because a single firm can suppoy a good or service to an entire market at a lower cost than two or more firms could. For these firms, a greater quantity of output yields a smaller average total cost.
16.2 - How Monopolies Make Production and Pricing Decisions#
Monopoly vs. Competition#
In a monopoly, the firm’s demand curve is the same as the market demand curve.
A Monopoly’s Revenue#
A monopolist’s marginal revenue is less than the price of its good.
When a monopoly increases the amount it sells, there are two effects on total revenue:
Output effect: More output is sold, so \(Q\) is higher, which increases total revenue.
Price effect: The price falls, so \(P\) is lower, which decreases total revenue.
Profit Maximization#
When marginal revenue exceeds marginal costs, production should be increased.
The monopolist’s profit-maximizing quantity of output is determined by the intersection of the marginal-revenue curve and the marginal-cost curve.
In competitive markets, price equals marginal cost. In monopolized markets, price exceeds marginal cost.
A Monopoly’s Profit#
For a monopoly,
16.3 - The Welfare Cost of Monopolies#
In a monopoly, the socially efficient quantity is found where the demand curve and the marginal-cost curve intersect.
The socially efficient outcome is found at the intersection of the demand and marginal-cost curves. However, the monopolist produces less than the socially efficient quantity of outcome.
16.4 - Price Discrimination#
Price discrimination, also known as price customization, is the business practice of selling the same good at different prices to different customers.
Arbitrage is the process of buying a good in one market at a low price and selling it another at a higher price to profit from the price difference.
Perfect price discrimination is a situation in which the monopolist knows exactly each customer’s willingness to pay and can charge each customer a different price.
Examples of price discrimination:
Movie tickets
Airline prices
Discount opportunites
Financial aid
Quantity discounts
16.5 - Public Policy toward Monopolies#
The courts are more worried about horizontal mergers, and less so about vertical mergers.
Synergies are brought about by mergers between two companies that result in more efficient production.