Economics

Monopoly
Dept. of Economics @ NCKU
Weng, Ming-Hung
 Question*
What is a monopoly?
How do you like a monopoly and why?
1. Pretty much
2. So so
3. Not at all
4. I hate monopoly
 Question
Can a monopoly ever be good for society?
 Outline
The monopoly
Monopoly decision making
Inefficiency of monopoly
Regulating the Monopoly
 the Monopoly
A monopoly is the only seller in
the market due to barriers to entry
Legal Barriers
Patent (Botox; Xerox; CDMA)
Copyright (25/Hello Kitty)
Control of key resources
(Property rights)(De beers;
Alcoa; National Palace Museum;
Indian reserves in USA)
 the Monopoly
Is THSR a monopoly?

Why would the

government allow a
sole player in this
market?
 Monopoly Decision-making
Demand facing
A competitive firm The market or the monopoly

(in million)

What is its impact??

2015 Pearson Education, Ltd.
 Marginal Revenue and Price
Suppose P=11-Q as P Q TR MR
the inverse demand.
MR from the 2nd unit 10 1 10 10
is 18-10=8 or 9-1=8 9 2 18 8
(smaller than $9);
MR from the 3rd unit; 8 3
1. $24 7 4
2. $8
3. $6 6 5
4. $3
 Marginal Revenue and Price
MR(Q=3)=24-18=6. P Q TR MR
MR(Q=3)=8-1x2=6<8=P
10 1 10 10
MR<P for the monopoly
whose sale is subjected 9 2 18 8
to its demand
8 3 24 6
MR>0: Total revenue 7 4 28 4
increases as the firm
produces more 6 5 30 2
Marginal Revenue of the Monopoly
Q to Q+1: the monopolys
marginal revenue is less
than the price it charges
MR=(A+B)-(A+C)=B-C
B: 2 , price of the last
unit sold.
C: (1 2 ) , loss
due to lower price for
units
 MR<P for monopoly
When MR<0 at its
> <
current output level,
the firms total

revenue (TR) is ____
as it produces more.

1. increasing
2. decreasing
3. maximized
4. minimized
 MR<P for monopoly
MR<0
>
< total revenue (TR)
<
decreasing as more is
> produces (Q or p)
< 1inelastic
MR=0 MR>0
TR increasing as
> < Q or p
> < > 1 elastic
MR=0
TR is maximized
 Monopoly decision
If Marginal Cost (MC) is P Q TR MR
constant $6 and no
Fixed Costs (FC), the 10 1 10 10
optimal (profit max)
9 2 18 8
output level is Q=3
(where MR=6) 8 3 24 6
Optimal price?
7 4 28 4

If MC=5? 6 5 30 2
Monopoly decision
Given the MR and
constant MC, the
monopoly
maximizes its profit
when producing at
Q=
1. 300
2. 400
3. 500
4. 600
Monopoly decision

The monopoly
maximizes its profit
when selling at P=$
1. 1

2. 3.5
3. 4
4. 6
 MR<P for monopoly
The firm maximizes its
>
profit when producing

at where MR=MC>0 or
elastic part of demand.

> MR=0 the optimal Q

Smaller than revenue
maximizing output
level
Inefficient as
MC=MR<P,
Monopoly decision (*)
Does the monopoly
have a supply curve?
1. YES, and increasing in
P
2. YES, but not
increasing in P
3. NO, theres no supply
curve for a monopoly
4. Some do, some dont
 Monopoly decision
A supply curve answers the question:

If the price is $x, how many units does the

firm want to produce?

A monopolist is not a price taker, but a price

maker; therefore, the supply relationship does
not exist
 Monopoly decision
Profit
= Total revenue total
cost
= (P x Q) (ATC x Q)
= Q (P ATC)
= 500M($3.50 - $1.02)
.
= $1,240,000,000
 Monopoly decision*
Will a monopolist make
more profit when
setting its price or when
setting its output level?
1. Price
2. Output level
(Quantity)
.
3. The same in either
case.
4. It depends.
Monopoly decision*

Will the monopoly

continue to make
economic profit in
the long run?
1. Yes
2. No
Market power
Price Markup
3.52 3
= = ;
2 4
Ratio of profit to cost
The larger the index the
greater the market power
The Lerner Index
1
=

Ratio of profit to price
The more elastic demand,
the less market power
The monopolist will charge a
lower price for the market
with a more elastic demand

The Broken Invisible Hand

>
 Inefficient monopoly(*)
If MC is constant $6, the P Q TR MR
monopolist causes a
deadweight loss equal 10 1 10 10
to
9 2 18 8
1. $1
2. $2 8 3 24 6
3. $3
4. $4
7 4 28 4
5. $5 6 5 30 2
6. $6
 Inefficient monopoly
The monopoly will produce at an

output level equal to
1. 500; 2. 600; 3. 800; 4. 1200

200 ()
()
170
140
90 ()

500 800
Ming-hung Weng, Dept. of Economics,
2010/3/21 26
NCKU
 Inefficient monopoly
The monopoly will set its price as $

1. 200; 2. 170; 3. 140; 4. 90

200 ()
()
170
140
90 ()

500 800
Ming-hung Weng, Dept. of Economics,
2010/3/21 27
NCKU
 Inefficient monopoly
If the firm is a price taker, its output

level will be 800 where P=MC because
P=MR for competitive sellers

200
()
170
140
90 ()
()

500 800
Ming-hung Weng, Dept. of Economics,
2010/3/21 28
NCKU
 Inefficient monopoly
The monopoly causes a deadweight

loss equal to the area.

200 ()
()
170
140
90 ()

500 800
Ming-hung Weng, Dept. of Economics,
2010/3/21 29
NCKU
 Regulating the monopoly
Why would the government create inefficient
monopolized industries?
Can a monopoly ever be good for society?
What can the government do to minimize the
possible inefficiency caused by the monopoly?
 Sources of Monopoly
Promoting Research and Development (R&D)
and innovating activities
Pharmaceutical
Artwork
Natural Barrier
Economies of Network: More individual
satisfaction derived from more
users(PC/Word/FB/Line/Language)
 Promoting R&D
Evidences of innovation tendency for countries
with
Weak patent protection
Hard-to-duplicate (scientific instruments/food processing)
Strong patent protection
reverse-engineered (manufacturing/machinery)

Too much protection is not good as well

 Sources of Monopoly(*)
If firms in an industry produce with the following
technology, the society would benefit most if there
exists ____ firm(s).
1. 1
2. 2
3. several
Demand
4. As many as possible

2015 Pearson Education, Ltd.

 Natural monopoly
Economies of scale increasing returns to
scale decreasing average total cost (ATC)

Natural monopoly
An industry naturally becomes monopoly if its
technology exhibiting economies of scale relative
to the market size (after competition)
 Regulating the monopoly
The government may set a price ceiling
at =$140 and change the firms MR to
induce an efficient output level

()
() with price ceiling

() ()


Ming-hung Weng, Dept. of Economics,
2010/3/21 35
NCKU
 The Broken Invisible Hand
Monopoly Competitive
output level output level

B C

Which area is the deadweight loss caused by the monopoly?

1. A
2. B
3. C
4. B+C Exhibit 12.11 Surplus Allocations: Perfect Competition Versus Monopoly
2015 Pearson Education, Ltd.
 Regulating a natural monopoly*

When the price is capped at $1.01, the monopoly

will produce an output level around
1. 500; 2. 600; 3. 800; 4. 1,000
 Regulating a natural monopoly
D

2
1

The natural monopoly is usually regulated with fair-

returns price otherwise firms may suffer loss.
1 : efficient price regulation
2 : fair-returns price regulation where firms breakeven
 Regulating a natural monopoly
Efficient (socially-optimal) price
Price is equal to marginal cost

Fair-returns price
Price is equal to average total cost
 Antitrust policy
Government policies trying to prevent
anti-competitive pricing, low
quantities, and deadweight loss from
emerging and dominating markets
Sherman Act (1890)

2015 Pearson Education, Ltd.

 Antitrust policy
fair-returns price regulation
Electricity/water price
Cable price
Regulating Anti-competitive
behaviors
Bell case
Microsoft Bundling Windows
operating system with
Internet Explorer browser
 Conclusion
The monopoly produces where MR=MC
Because P>MR=MC, the monopoly causes
inefficiency
Optimal regulating sets P=MC but for natural
monopoly the regulating price is set P=AC