Chapter 13 - Parkin - PowerPoint

Monopoly
Chapter 13
Economics 3ed: Global and Southern African Perspectives © 2020 1

Main ideas
After studying this chapter, you will be able to:
• Explain how monopoly arises and distinguish between single-price monopoly

and price-discriminating monopoly
• Explain how a single-price monopoly determines its output and price
• Compare the performance and efficiency of single-price monopoly and
competition
• Explain how price discrimination increases profit
• Explain how monopoly regulation influences output, price, economic profit, and
efficiency

Monopoly and How it Arises
Monopoly
• Market with a single firm
• Produces a good or service for which no close substitute exists
• Protected by a barrier that prevents other firms from entering market
How monopoly arises
• No close substitute
• Barriers to entry
o Natural barriers to entry – natural monopoly
o Ownership barriers to entry – e.g. De Beers
o Legal barriers to entry – legal monopoly
• Public franchise
• Government license
• Patent
• Copyright

Monopoly and How it Arises
Monopoly price-setting strategies:
• Monopolies set their own prices
Single price monopoly
• Must sell each unit of its output for the same price to all its customers
Price discriminating monopoly
• Sells different units of a good or service for different prices

A Single-Price Monopoly’s Output and
Price Decision
Price and marginal revenue Marginal revenue and elasticity
• There is only one firm, so demand • MR is related to elasticity of demand for
curve facing the firm = market demand the good:
curve • Elastic demand: elasticity > 1
• TR = P x Q • Inelastic demand: elasticity < 1
• MR = ∆TR / ∆Q • Unit elastic demand: elasticity = 1
• MR < P • Monopolistic demand = elastic

A Single-Price Monopoly’s Output and
Price Decision
Price and Output Decision
• Maximise economic profit = (P – ATC) x Q
• Where MR = MC and P = D

Single-Price Monopoly and Competition
Compared
Perfect Competition
• Equilibrium where S (= MC) = D
Monopoly
• Competitive market’s S curve
becomes monopoly’s MC curve
• Compared to perfectly competitive
market, single-price monopoly
produces smaller output and charges
higher price

Compared
Perfect Competition
• Equilibrium P and Q where S = D
• Efficient: MSB = MSC
• Surplus is maximised
• LRAC is minimised
Monopoly
• Equilibrium P and Q where MR = MC
and P = D
• Smaller Q and higher P than perfect
competition
• Inefficient: MSB > MSC
• Surplus is redistributed, and also
shrinks due to deadweight loss
• LRAC is not minimised

Compared
Rent seeking
• Surplus = economic rent
• Pursuit of wealth through capturing economic
rent = rent seeking
• Monopoly redistributes consumer surplus to
producer surplus (profit)
o So, pursuit of monopoly profit = rent
seeking
• Monopolists engage in rent seeking in two
ways:
o Buy a monopoly
o Create a monopoly
Rent-seeking Equilibrium
• No barrier to entry into rent seeking
• Rent seeking is like perfect competition
• Competition among rent seekers pushes up
ATC
• Rent seeker makes zero economic profit
• Deadweight loss is larger by amount of lost
producer surplus
Price Discriminating Monopoly
• Price discrimination increases economic profit
Two ways of price discrimination
• Discriminate among groups of buyers
• Discriminate among units of a good
• Price discriminator captures consumer surplus, converts to producer surplus

• Buyers pay a price as close as possible to the maximum willingness to pay

Price Discriminating Monopoly
Perfect price discrimination
• Occurs if a firm is able to sell each unit of output for the highest price anyone is
willing to pay for it
• Consumer surplus is eliminated and captured as producer surplus
• Market D curve becomes MR curve
• Achieves efficiency, since deadweight loss = 0

Monopoly Regulation
Efficient regulation of a natural monopoly
• Marginal cost pricing rule: set P = MC
o Results in efficient Q, but economic loss
o Cover loss through price discrimination
• Average cost pricing rule: set P = AC
o Results in break-even, but deadweight
loss
• Government subsidy:
o Results in deadweight loss through
taxation
• Rate of return regulation: justify P by
showing low rate of return on capital
o Results in over-inflated wasteful
expenditure
• Price cap regulation: set price ceiling

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Monopoly

Economics 3ed: Global and Southern African Perspectives © 2020 1

• Explain how monopoly arises and distinguish between single-price monopoly

Economics 3ed: Global and Southern African Perspectives © 2020 2

Economics 3ed: Global and Southern African Perspectives © 2020 3

Economics 3ed: Global and Southern African Perspectives © 2020 4

Economics 3ed: Global and Southern African Perspectives © 2020 5

Economics 3ed: Global and Southern African Perspectives © 2020 6

Economics 3ed: Global and Southern African Perspectives © 2020 7

Economics 3ed: Global and Southern African Perspectives © 2020 8

• Price discriminator captures consumer surplus, converts to producer surplus

Economics 3ed: Global and Southern African Perspectives © 2020 10

Economics 3ed: Global and Southern African Perspectives © 2020 11

Economics 3ed: Global and Southern African Perspectives © 2020 12

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