Chapter 9-Monopoly

Reporter: Renalyn B. Candelario

Marvin Abentijado

Shyne Marie Fermo

Monopoly- Market structure characterized by single seller selling unique a unique product in the market
in which Monopoly market, the seller faces no competition, as he is the sole seller of goods with no
close substitute.

Price setter- sets and chooses its price based on its output decision.

Barriers to Entry- there several factors which prohibit a firm from entering the market and these are
called Barriers to entry. In case of monopoly, strong Barriers are present which effectively affect the
entry of potential competitors. In the absence of strong Barriers, there will be a large number of firms
competing in a market.

Economies of Scale- Economies of scale serve as protection for the monopolist In a in a specific specific
market or what we commonly term as barrier to entry. Small-scale producers entering the market
cannot realize the cost economies of the monopolist therefore making them out of the business by the
monopolist, because of its ability to cost products at a much lower price while still making a profit due to
small per-unit cost associated with its economies of Scale.

Legal Barriers to Entry

Patents- patient is an exclusive right of an inventor to use, or allow other people to use, his or her
invention. This aims to protect an inventory from rivals who would use the invention without having the
permission and sharing of efforts and expresses in developing it. The patient gives the inventor a
monopoly position over the lifetime of the patient.

Licenses- the government may limit the entry of different in an industry by issuing Licenses.

Ownership or Control of Essential Resources – A monopolist may use his private property to prevent
rivals from entering the market.

Pricing and other strategic Barriers- The monopolist may create his own entry barrier by slashing down
its price, increasing its advertising, and making other strategies which give an obstacle for the rival to
succeed.

Monopoy Demand- Let us start by making three assumptions to be able to build a model of a pure
monopoly do that we can analyze its price and output decisions.
 1. Economies of scale Patents or resources ownership secure the firm’s monopoly.
2. The monopoly sets a single price for all of units of output.
3. No government unit regulates the monopoly.

MR=MC Rule

- A profit- seeking monopolist has no differences with competitive one in terms of the
rationale
- If producing is preferable to shutting down, then it will produce up to the output at
which marginal revenue is equal to margin cost. (MR=MC)
The monopolist is a Price Maker
- Pure monopolist, oligopolists, and monopolistic competitor face a downward sloping
demand curve. First those industries can decide on the degree of supply with their
output decision. In varying market supply, they can also influence produce price.

Possibility of Losses by Monopolist- a pure monopolist has a greater possibility of making

economic profit as compared with purely competitive firm. A competitive firm is Destined to
have a normal profit in the long run in contrast a pure monopolist can enjoy economic
profit, for the barriers block the rivals from increasing supply then drive down price which
will soon remove economic profit.

Price Discrimination- Selling a specific product at several prices not justified by cost
differences.

1. Charging the market the minimum price that a consumer is willing to pay
2. Charging a specific for the first for the first set of purchases and then reducing it for
subsequent purchases.
3. Charging some customers a certain price and then another price for the customers.

Conditions- it is not possible for all firms to engage in price Discrimination, it can only exist when the
following conditions are met:

1. Monopoly Power- the firm must be monopolist or, at least possess Monopoly power at some
degree, giving them the ability to control its price output.
2. Market Segregation- the market must be able to Segregation its consumer into unique classes,
each having different ability and willingness to pay for a product. This is usually based on
different price elasticities of demand.
3. No Resale- the original purchaser cannot resell the product that he bought. If the monopolist
who sells a product at a low- price then the resale of thus product at a higher- price segment.
Then this will result in a decrease of price in the high- price segment. The monopolist, then
cannot have the price Discrimination policy.
Socially Optimal Price P= MC

A regulatory commission must set a legal ceiling price if they aim to regulate the monopoly and then
achieve an allocative efficiency, the monopolist must charge a price which equals its marginal cost.

With the legal ceiling price, the monopolist will maximize profit by producing Q, units of output because
at this output MR= P= MC. By charging higher prices than those set by the regulatory body makes it
illegal. So a firm cannot set high prices to obtain higher profit.

Simply, the regulatory commission can drive competition by imposing legal ceiling prices, which will
result for a monopolist's decision to produce a specific quantity where price equals the marginal cost.
This equality shows an efficient allocation of resources, which results in a socially optimal price.
Total Revenue Curve
Figure 9.2 Price and marginal Revenue in a pure monopoly