Why Monopolies Arise

A monopoly is a firm that is the sole seller of a product

DSME1030 Economics for without close substitutes.

Business Studies I A monopoly firm has market power, the ability to

influence the market price of the product it sells.

The main cause of monopolies is barriers to entryother

Monopoly firms cannot enter the market. Three sources of barriers to
entry:
Rao Fu
Fall 2017 1. A single firm owns a key resource.
2. The government gives a single firm the exclusive right to
produce the good.

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Why Monopolies Arise Monopoly vs. Competition: Demand Curves

3. Natural monopoly: a single firm can produce the entire
market Q at lower cost than could several firms.

Example: 1000 homes need electricity

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 Exercise: A Monopolys Revenue Common Grounds Demand and MR Curves
Common Grounds is the only Increasing Q has two
seller of cappuccinos in town. effects on revenue:
The table shows the market Output effect: higher
demand for cappuccinos. output raises revenue
Price effect: lower
Fill in the missing spaces of price reduces revenue
the table.
What is the relation between P
and AR? Between P and MR?

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Profit-Maximization The Monopolists Profit

Like a competitive firm, a monopolist maximizes profit by monopolists
producing the quantity where MR = MC. profit equals
(P ATC) x Q

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 Monopoly Drugs versus Generic Drugs The Welfare Cost of Monopoly
Patents on new drugs give In the monopoly equilibrium:
a temporary monopoly to P > MR = MC
the seller.

When the patent expires,

the market becomes
competitive, generics
appear.

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Perfect Price Discrimination vs. Single Price Monopoly Examples of Price Discrimination
Price discrimination: selling the same good at different
Movie tickets
prices to different buyers.

Airline prices

Discount coupons

Need-based financial aid

Quantity discounts

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Public Policy Toward Monopolies
Increasing competition with antitrust laws

Regulation

Public ownership

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