Chapter 11: Monopoly and Antitrust Policy

Principles of Economics
ECON F211

Dr. Rahul Arora

Assistant Professor,
Department of Economics & Finance,
BITS Pilani, Pilani Campus
rahul.arora@Pilani.bits-Pilani.ac.in
Mob: +91 – 7607481292

Background design is taken from the presentation slides of Salvatore:

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 Imperfect Competition and Market Power

Imperfectly competitive industry

 An industry in which individual firms have some control
over the price of their output
Market power
 An imperfectly competitive firm’s ability to raise price
without losing all of the quantity demanded for its
product

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 Forms of Imperfect Competition

 A monopoly is an industry with a single firm in which the entry

of new firms is blocked.
 Pure monopoly An industry with a single firm that
produces a product for which there are no close
substitutes and in which significant barriers to entry
prevent other firms from entering the industry to compete
for profits.

 An oligopoly is an industry in which there is a small number of

firms, each large enough so that its presence affects prices.

 Firms that differentiate their products in industries with many

producers and free entry are called monopolistic competitors

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 Price & Output Decisions in Pure Monopoly

 The decisions depends upon the associated costs and revenue

 From the cost side, it is similar to the perfectly competitive

firm

 Monopolist differs from revenue aspect. How ?

 Monopolist is a market itself
 Can influence prices
 Expectations to earn more profits can affect prices

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 Demand in Monopoly Markets

TABLE 13.1 Marginal Revenue Facing a Monopolist

(1) (2) (3) (4)
Quantity Price Total Marginal
Revenue Revenue
0 $11 0 -
1 10 $10 $10
2 9 18 8
3 8 24 6
4 7 28 4
5 6 30 2
6 5 30 0
7 4 28 -2
8 3 24 -4
9 2 18 -6
10 1 10 -8

 FIGURE 13.2 Marginal Revenue Curve Facing a Monopolist

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 TABLE 13.1 Marginal Revenue Facing a Monopolist
(1) (2) (3) (4)
Quantity Price Total Marginal
Revenue Revenue
0 $11 0 -
1 10 $10 $10
2 9 18 8
3 8 24 6
4 7 28 4
5 6 30 2
6 5 30 0
7 4 28 -2
8 3 24 -4
9 2 18 -6
10 1 10 -8

FIGURE 13.3 Marginal Revenue and Total Revenue: A

monopoly’s marginal revenue curve bisects the quantity axis
between the origin and the point where the demand curve
hits the quantity axis.

A monopoly’s MR curve shows the change in total revenue

that results as a firm moves along the segment of the
demand curve that lies exactly above it

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 Monopolist’s Profit Maximizing Price & Output

FIGURE 13.4 Price and Output

Choice for a Profit-Maximizing
Monopolist:
A profit-maximizing monopolist
will raise output as long as
marginal revenue exceeds
marginal cost

Maximum profit is at an output of

5 units per period and a price of
$6

Above 5 units of output, marginal

cost is greater than marginal
revenue

increasing output beyond 5 units

would reduce profit

At 5 units, TR = PmAQm0, TC =
CBQm0, and profit = PmABC
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 Supply Curve in Monopoly

 A monopoly firm has no supply curve that is independent

of the demand curve for its product

 A monopolist sets both price and quantity, and the amount

of output that it supplies depends on its marginal cost
curve and the demand curve that it faces

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 Perfect Competition and Monopoly
Compared

FIGURE 13.5 A Perfectly Competitive Industry in Long-Run Equilibrium

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 Perfect Competition and Monopoly
Compared

FIGURE 13.6 Comparison of Monopoly and Perfectly Competitive Outcomes for a Firm with Constant Returns
to Scale

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 Monopoly in the Long Run: Barriers to Entry

Factors that prevent new firms from entering and competing in

imperfectly competitive industries

Patent
 A barrier to entry that grants exclusive use of the patented product or
process to the inventor
Government Rules
 In some cases, governments impose entry restrictions on firms as a
way of controlling activity
Ownership of a Scarce Factor of Production
 If production requires a particular input and one firm owns the entire
supply of that input, that firm will control the industry
Network Effects
 Network Externalities: The value of a product to a consumer
increases with the number of that product being sold or used in the
market. 11
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 Natural monopoly

 An industry that realizes such large economies of scale in producing

its product that single-firm production of that good or service is
most efficient
• A natural monopoly is a firm in
which the most efficient scale
is very large.
• Here, average total cost
declines until a single firm is
producing nearly the entire
amount demanded in the
market.
• With one firm producing
500,000 units, average total
cost is $1 per unit.
• With five firms each producing
100,000 units, average total
cost is $5 per unit.

FIGURE 13.7 A Natural Monopoly

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 Social Cost of Monopoly: Calculation of
Dead-Weight Loss
• A demand curve shows the amounts
that people are willing to pay at each
potential level of output.

• Thus, the demand curve can be used to

approximate the benefits to the
consumer of raising output above 2,000
units.

• MC reflects the marginal cost of the

resources needed.

• The triangle ABC roughly measures the

net social gain of moving from 2,000
units to 4,000 units (or the loss that
results when monopoly decreases
output from 4,000 units to 2,000 units)
 FIGURE 13.8 Welfare Loss from Monopoly
• This loss is known as Dead-Weight Loss
which is neither recovered by the
producer nor by the consumer
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 Price Discrimination

Charging different prices to different buyers

Perfect price discrimination – It occurs when a firm charges the
maximum amount that buyers are willing to pay for each unit

FIGURE 13.9 Price Discrimination

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 Examples of Price Discrimination

 Airlines, movie theaters, hotels, and many other industries

routinely charge a lower price for children and the elderly.

 In each case, the objective of the firm is to segment the market

into different identifiable groups, with each group having a
different elasticity of demand.

 The optimal strategy for a firm that can sell in more than one
market is to charge higher prices in markets with low demand
elasticities.

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 Imperfect Markets: A Review and a Look
Ahead
 A firm has market power when it exercises some control over the price of its
output or the prices of the inputs that it uses. The extreme case of a firm
with market power is the pure monopolist. In a pure monopoly, a single firm
produces a product for which there are no close substitutes in an industry in
which all new competitors are barred from entry.

 Our focus in this chapter on pure monopoly (which occurs rarely) has
served a number of purposes.

 First, the monopoly model describes a number of industries quite well.

 Second, the monopoly case illustrates the observation that imperfect

competition leads to an inefficient allocation of resources.

 Finally, the analysis of pure monopoly offers insights into the more
commonly encountered market models of monopolistic competition and
oligopoly, which we discussed briefly in this chapter and will discuss in
detail in the next two chapters. 16
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Reference

Case, K.E., Fair, R.C., & Oster, S.E. (2018). Principles of Economics. 12th
Edition, Pearson India Education Services Pvt. Ltd.

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