Chapter 15

Monopoly

© 2002 by Nelson, a division of Thomson Canada Limited

In this chapter you will…
•• Learn
Learn why
why some
some markets
markets havehave only
only one
one
seller.
seller.
•• Analyze
Analyze how
how monopoly
monopoly determines
determines the the
quantity
quantity to
to produce
produce andand the
the price
price to
to
charge.
charge.
•• See
See how
how monopoly’s
monopoly’s decisions
decisions affect
affect
economic
economic well-being.
well-being.
•• Consider
Consider the
the various
various public
public policies
policies aimed
aimed
at
at solving
solving the
the monopoly
monopoly problem.
problem.
•• See
See why
why monopolies
monopolies try try to
to charge
charge
different
different prices
prices to
to different
different customers.
customers.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 MONOPOLY
•• While
While aa competitive
competitive firm
firm is
is aa
price
price taker,
taker, aa monopoly
monopoly firm
firm isis aa
price
price maker.
maker.
•• AA firm
firm is is considered
considered aa monopoly
monopoly
ifif .. .. ..
––itit isis the
the sole
sole seller
seller of
of its
its product.
product.
––its
its product
product does
does not
not have
have close
close
substitutes.
substitutes.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Why Monopolies Arise
•• The
The fundamental
fundamental cause
cause ofof
monopoly
monopoly is
is barriers
barriers to
to entry.
entry.
•• Barriers
Barriers to
to entry
entry have
have three
three sources:
sources:
–– Ownership
Ownership of of aa key
key resource.
resource.
–– The
The government
government givesgives aa single
single firm
firm the
the
exclusive
exclusive right
right toto produce
produce some
some good.
good.
–– Costs
Costs of
of production
production make make aa single
single
producer
producer more
more efficient
efficient than
than aa large
large
number
number ofof producers.
producers.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Why Monopolies Arise
•• Monopoly
Monopoly resources
resources
–– Although
Although exclusive
exclusive ownership
ownership of
of aa key
key
resource
resource is is aa potential
potential source
source of
of
monopoly,
monopoly, in in practice
practice monopolies
monopolies rarely
rarely
arise
arise for
for this
this reason.
reason.
•• Government
Government created created monopolies
monopolies
–– Governments
Governmentsmay mayrestrict
restrictentry
entryby
bygiving
givingaa
single
singlefirm
firmthe
the exclusive
exclusiveright
rightto
tosell
sellaa
particular
particulargood
good in
in certain
certainmarkets.
markets.
–– Patent
Patentand
andcopyright
copyrightlaws
laws are
aretwo
two important
important
examples
examplesof ofhow
how government
government creates
createsaa
monopoly
monopolyto to serve
servethe
thepublic
publicinterest.
interest.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Why Monopolies Arise
•• Natural
Natural Monopolies
Monopolies
–– An
An industry
industry isis aa natural
natural monopoly
monopoly whenwhen
aa single
single firm
firm can
can supply
supply aa good
good or or
service
service to
to an
an entire
entire market
market at
at aa smaller
smaller
cost
cost than
than could
could twotwo or
or more
more firms.
firms.
–– AA natural
natural monopoly
monopoly arises
arises when
when there
there
are
are economies
economies of of scale
scale over
over the
the
relevant
relevant range
range of of output.
output.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

Figure 15-1: Economies of Scale as a Cause
of Monopoly
Cost

Average
total
cost

0
Quantity of Output

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Pricing and Production Decisions
•• Monopoly
Monopoly versus
versus Competition
Competition
–– Monopoly
Monopoly
•• Is
Isthe
thesole
soleproducer
producer
•• Faces
Facesaadownward-sloping
downward-slopingdemand
demandcurve
curve
•• Is
Isaaprice
pricemaker
maker
•• Reduces
Reducesprice
priceto
toincrease
increase sales
sales
–– Competitive
Competitive Firm
Firm
•• Is
Isone
oneof
of many
manyproducers
producers
•• Faces
Facesaahorizontal
horizontaldemand
demandcurvecurve
•• Is
Isaaprice
pricetaker
taker
•• Sells
Sellsas
asmuch
muchor oras
aslittle
littleat
atsame
sameprice
price

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Figure 15-2: Demand Curves for Competitive
and Monopoly Firms
(a) Competitive Firm (b) Monopoly
Price Price

Demand

Demand

0 0
Quantity of Output Quantity of Output

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 A Monopoly’s Revenue
•• Total
Total Revenue
Revenue
PP ×× Q
Q == TR
TR
•• Average
Average Revenue
Revenue
TR/Q
TR/Q == ARAR == PP
•• Marginal
Marginal Revenue
Revenue
∆TR/∆Q
∆TR/∆Q == MR MR

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

Table 15-1: A Monopoly’s Total, Average,
and Marginal Revenue.

Quantity of Total Average Marginal

Water Price Revenue Revenue Revenue
(Q) (P) (TR = P x Q) (AR = P x Q) (MR = ∆TR/∆Q)

0 $ 11 $0 ------
$ 10
1 10 10 $ 10
8
2 9 18 9
6
3 8 24 8
4
4 7 28 7
2
5 6 30 6
0
6 5 30 5
-2
7 4 28 4
-4
8 3 24 3

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 A Monopoly’s Revenue
•• A
A Monopoly’s
Monopoly’s Marginal
Marginal Revenue
Revenue
––AA monopolist’s
monopolist’s marginal
marginal revenue
revenue
is
is always
always less
less than
than the
the price
price of
of its
its
good.
good.
•• The
The demand
demand curve
curve isis downward
downward
sloping.
sloping.
•• When
When aa monopoly
monopoly drops
drops the
the price
price to
to
sell
sell one
one more
more unit,
unit, the
the revenue
revenue
received
received from
from previously
previously soldsold units
units
also
also decreases.
decreases.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 A Monopoly’s Revenue
•• A
A Monopoly’s
Monopoly’s Marginal
Marginal Revenue
Revenue
––When
When aa monopoly
monopoly increases
increases thethe
amount
amount itit sells,
sells, itit has
has two
two effects
effects
on
on total
total revenue
revenue (P (P ×× Q).
Q).
•• The
The output
output effect—more
effect—more output
output isis
sold,
sold, so
so Q
Q is
is higher.
higher.
•• The
The price
price effect—price
effect—price falls,
falls, so
so PP is
is
lower.
lower.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Figure 15-3: The Demand and Marginal
Revenue Curves for a Monopoly
Price

11
10
9
8
7
6
5
4
Demand
3 (average
2 Marginal revenue)
revenue
1
0
–1 1 2 3 4 5 6 7 8
–2
–3
–4
Quantity of Water

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Profit Maximization
•• AA monopoly
monopoly maximizes
maximizes profit
profit by
by
producing
producing the the quantity
quantity at
at which
which marginal
marginal
revenue
revenue equals
equals marginal
marginal cost.
cost.
•• ItIt then
then uses
uses the
the demand
demand curve
curve to
to find
find the
the
price
price that
that will
will induce
induce consumers
consumers to to buy
buy
that
that quantity.
quantity.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Figure 15-4: Profit Maximization for a
Monopoly
Costs and 2. … and then the demand
Revenue curve shows the price
consistent with this quantity.

1. The intersection of the

MR curve and the MC curve
determines the profit
Monopoly B maximizing quantity…
price

Average total cost

A
Demand

Marginal cost
Marginal revenue

0 Q1 QMAX Q2
Quantity

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Profit Maximization
•• Comparing
Comparing Monopoly
Monopoly and and Competition
Competition
–– For
For aa competitive
competitive firm,
firm, price
price equals
equals
marginal
marginal cost.
cost.
PP == MR
MR == MC
MC
–– For
For aa monopoly
monopoly firm,
firm, price
price exceeds
exceeds
marginal
marginal cost.
cost.
PP >> MR
MR == MC
MC

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 A Monopoly’s Profit
•• Profit
Profit equals
equals total
total revenue
revenue minus
minus
total
total costs.
costs.
––Profit
Profit == TR
TR -- TC
TC
––Profit
Profit == (TR/Q TC/Q) ×× Q
(TR/Q -- TC/Q) Q
––Profit
Profit == (P ATC) ×× Q
(P -- ATC) Q

•• The
The monopolist
monopolist will
will receive
receive
economic
economic profits
profits as
as long
long as
as price
price is
is
greater
greater than
than average
average total
total cost.
cost.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Figure 15-5: The Monopoly’s Profit

Costs and
Revenue Marginal cost

Monopoly E B
price

Monopoly Average total cost

profit

Demand
Average
total cost
D C

Marginal revenue

0 QMAX
Quantity

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

CASE STUDY: The Market for Drugs

•• AA new
new drug
drug discovery
discovery givesgives rise
rise to
to aa
patent
patent and
and gives
gives the
the firm
firm aa monopoly
monopoly on on
the
the sale
sale of
of that
that drug.
drug.
•• When
When the
the patent
patent expires
expires andand any
any company
company
can
can make
make oror sell
sell the
the drug.
drug.
•• The
The market
market switches
switches fromfrom being
being
monopolistic
monopolistic to to being
being competitive.
competitive.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Figure 15-6: The Market for Drugs

Costs and
Revenue

Price
during
patent life

Price after Marginal cost

patent Demand
expires

Marginal revenue

Monopoly Competitive
0 quantity quantity Quantity

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 THE WELFARE COST OF
MONOPOLY
•• In
In contrast
contrast toto aa competitive
competitive firm,
firm, the
the
monopoly
monopoly charges
charges aa price
price above
above the the
marginal
marginal cost.
cost.
•• From
From the
the standpoint
standpoint of of consumers,
consumers,
this
this high
high price
price makes
makes monopoly
monopoly
undesirable.
undesirable.
•• However,
However, from
from thethe standpoint
standpoint of of the
the
owners
owners ofof the
the firm,
firm, the
the high
high price
price
makes
makes monopoly
monopoly very very desirable.
desirable.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

Figure 15-7: The Efficiency Level of Output
Price
Marginal cost

Value to Cost to
buyers monopolist

Cost to Value to Demand (Value

monopolist buyers to buyers)

0 Efficient Quantity
quantity

Value to buyers is greater Value to buyers is less

than cost to sellers than cost to sellers

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Deadweight Loss
•• Because
Because aa monopoly
monopoly sets sets its
its price
price above
above
marginal
marginal cost,
cost, itit places
places aa wedge
wedge between
between
the
the consumer’s
consumer’s willingness
willingness to to pay
pay and
and the
the
producer’s
producer’s cost.
cost.
–– This
This wedge
wedge causes
causes thethe quantity
quantity sold
sold toto
fall
fall short
short of
of the
the social
social optimum.
optimum.
•• The
The Inefficiency
Inefficiency of of Monopoly
Monopoly
–– The
The monopolist
monopolist produces
produces less
less than
than the
the
socially
socially efficient
efficient quantity
quantity of
of output.
output.
–– The
The “economic
“economic pie” pie” shrinks.
shrinks.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Figure 15-8: The Inefficiency of Monopoly

Price
Deadweight Marginal cost
loss

Monopoly
price

Demand

Marginal revenue

Monopoly Efficiency
0 Quantity
quantity quantity

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Deadweight Loss
•• The
The deadweight
deadweight loss loss caused
caused by by aa
monopoly
monopoly is is similar
similar toto the
the
deadweight
deadweight lossloss caused
caused by by aa tax.
tax.
•• The
The difference
difference between
between the the two
two
cases
cases is
is that
that the
the government
government gets gets
the
the revenue
revenue from
from aa tax,
tax, whereas
whereas aa
private
private firm
firm gets
gets the
the monopoly
monopoly profit.
profit.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 PUBLIC POLICY TOWARD
MONOPOLIES
•• Government
Government responds
responds to to the
the
problem
problem ofof monopoly
monopoly in in one
one ofof four
four
ways.
ways.
––Making
Making monopolized
monopolized industries
industries
more
more competitive.
competitive.
––Regulating
Regulating the
the behaviour
behaviour of of
monopolies.
monopolies.
––Turning
Turning some
some private
private monopolies
monopolies
into
into public
public enterprises.
enterprises.
––Doing
Doing nothing
nothing atat all.
all.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi
 Competition Law
•• Legislation
Legislationdesigned
designed to to encourage
encouragecompetition
competition
and
anddiscourage
discouragethethe use
useofof monopoly
monopolypractices
practices
can
cancurb
curbthe
theinefficiencies
inefficienciesresulting
resulting from
from market
market
power
powerin in general
general and
andmonopoly
monopolyin inparticular.
particular.
•• Competition
Competitionlaw law has
has aalong
longhistory
historyinin Canada:
Canada:
–– 1889:
1889: The
TheAct
Actfor
for the
thePrevention
Prevention and
and
Suppression
Suppression of of Combinations
CombinationsFormedFormed inin
Restraint
RestraintofofTrade.
Trade.
–– 1910:
1910: Combines
Combines Investigation
Investigation ActAct
–– 1986:
1986: Competition
Competition Act
Act and
and the
theCompetition
Competition
Tribunal
TribunalAct
Act

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Competition Law
•• The
The Competition
Competition Act:
Act:
•• “…
“… maintain
maintain and
and encourage
encourage competition
competition in in
Canada
Canada in
in order
order to
to promote
promote thethe efficiency
efficiency
and
and adaptability
adaptability of
of the
the Canadian
Canadian
economy…
economy… …. …. and
and inin order
order to
to provide
provide
consumers
consumers with
with competitive
competitive prices
prices and
and
product
product choices.”
choices.”
•• Competition
Competition law
law inin Canada
Canada is is enforced
enforced by by
the
the Commissioner
Commissioner of of Competition
Competition of of the
the
Competition
Competition Bureau,
Bureau, aa unit
unit within
within the
the
Federal
Federal government’s
government’s Industry
Industry Canada.
Canada.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Competition Law
•• Competition
Competition laws laws have
have costs
costs and
and benefits.
benefits.
–– Sometimes
Sometimes companies
companies merge
merge notnot to
to
reduce
reduce competition
competition but
but to
to lower
lower costs
costs
through
through joint
joint production.
production.
–– The
The benefits
benefits of
of greater
greater efficiencies
efficiencies
through
through mergers
mergers areare called
called synergies.
synergies.
•• IfIf the
the competition
competition lawslaws are
are to
to raise
raise social
social
welfare,
welfare, the the government
government must
must determine
determine
which
which mergers
mergers are are desirable
desirable and
and which
which
are
are not.not.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Regulation
•• Government
Government may may regulate
regulate the
the prices
prices that
that
the
the monopoly
monopoly charges.
charges. This
This is
is often
often the
the
case
case with
with natural
natural monopolies
monopolies wherewhere
governments
governments regulate
regulate thethe price.
price.
–– The
The allocation
allocation ofof resources
resources will
will be
be
efficient
efficient and
and total
total surplus
surplus maximized
maximized ifif
price
price is
is set
set to
to equal
equal marginal
marginal cost.
cost.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Regulation
•• Two
Twopractical
practical problems
problemsassociated
associated with with
marginal-cost
marginal-cost pricing.
pricing.
1.
1. Natural
Natural monopolies
monopoliesoften oftenhave
havedeclining
declining
average
averagetotal
total cost.
cost.(See
(SeeFigure
Figure15-9)
15-9)
–– The
Theprice
price is
isless
lessthan
than ATCATCthus
thus creating
creating
losses.
losses.
1.
1. No
Noincentive
incentiveforformonopolist
monopolistto toreduce
reducecosts.
costs.
–– Reducing
Reducingcosts
costs will
will reduce
reduceprices.
prices.
–– In
Inpractice,
practice, regulators
regulatorswill will allow
allow
monopolists
monopoliststo to keep
keep some
someof of the
thebenefits
benefits
from
fromlower
lowercosts
costs in in the
theform
form of of higher
higher
profit,
profit, aapractice
practice that
thatrequires
requiressomesome
departure
departurefromfrom marginal-cost
marginal-costpricing.
pricing.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Figure 15-9: Marginal Cost Pricing

Price

Average
total cost
Average total cost
Regulated Loss
price
Marginal cost

Demand

0 Quantity

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Public Ownership
•• Rather
Rather than
than regulating
regulating aa natural
natural
monopoly
monopoly thatthat is
is run
run by
by aa private
private
firm,
firm, the
the government
government can can run
run the
the
monopoly
monopoly itself.
itself.
–– Crown
Crown Corporations
Corporations
•• Canada
Canada Post
Post
•• CBC
CBC
•• Hydro-Québec
Hydro-Québec
•• Saskatchewan
Saskatchewan Tel
Tel and
and B.C.
B.C. Tel.
Tel.
•• Ontario
Ontario Hydro.
Hydro.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Doing Nothing
•• Government
Government can can do do nothing
nothing at at all
all ifif the
the
market
market failure
failure is
is deemed
deemed small
small compared
compared
to
to the
the imperfections
imperfections of of public
public policies.
policies.
•• Government
Government intervention
intervention such such as
as
regulation
regulation can can cause
cause average
average costs
costs to to
inflate
inflate (Political
(Political failure),
failure), increasing
increasing the the
deadweight
deadweight loss loss above
above its
its “do
“do nothing”
nothing”
level.
level. (See
(See Figure
Figure 15-10)
15-10)

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Figure 15-10: Political Failure and Average
Costs Curves
Price

F
Pinflated
P0 A ATCinflated

D
Ptrue ATCtrue
G B
C
E Marginal cost

Demand

Marginal revenue

0 Qinflated Q0 Qtrue
Quantity

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 PRICE DISCRIMINATION
•• Price
Price discrimination
discrimination is is the
the business
business
practice
practice of of selling
selling thethe same
same goodgood atat
different
different prices
prices toto different
different customers,
customers,
even
even though
though thethe costs
costs forfor producing
producing for for
the
the two
two customers
customers are are the
the same.
same.
•• Price
Price discrimination
discrimination is is not
not possible
possible when
when
aa good
good is is sold
sold inin aa competitive
competitive market
market
since
since there
there are
are many
many firms
firms all
all selling
selling at
at
the
the market
market price.
price. In In order
order to to price
price
discriminate,
discriminate, the the firm
firm must
must have
have some
some
market
market power.
power.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi
 PRICE DISCRIMINATION
•• Perfect
PerfectPrice
PriceDiscrimination
Discrimination refers
refersto
to the
the
situation
situationwhen
whenthe themonopolist
monopolistknows
knowsexactly
exactly
the
thewillingness
willingnessto topay
payof
of each
eachcustomer
customerand andcan
can
charge
chargeeacheachcustomer
customeraa different
different price.
price.
•• Three
Threeimportant
importanteffects
effects of
ofprice
pricediscrimination:
discrimination:
–– ItIt can
canincrease
increase thethemonopolist’s
monopolist’sprofits.
profits.
–– Need
Needto toseparate
separatecustomers
customersaccording
accordingto to
their
theirability
abilityto
topay.
pay.
•• No
Noarbitrage,
arbitrage,the
theprocess
processofofbuying
buyingaagoodgoodin
inone
one
market
marketat
ataalow
lowprice
priceand
andselling
sellingititin
inanother
another
market
marketat
ataahigher
higherprice.
price.
–– ItIt can
canreduce
reduce deadweight
deadweightloss.
loss.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Figure 15-11: Welfare with and without Price
Discrimination
(a) Single price monopolist (b) Perfectly discriminating monopolist
Price Price

Consumer
surplus

Monopoly Deadweight
price loss

Profit Profit
MC MC

D D

MR

0 Quantity 0 Quantity
Quantity Quantity
sold sold

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 PRICE DISCRIMINATION
•• Examples
Examples of of Price
Price Discrimination
Discrimination
–– Movie
Movie tickets
tickets
–– Airline
Airline prices
prices
–– Discount
Discount coupons
coupons
–– Financial
Financial aid
aid
–– Quantity
Quantity discounts
discounts

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

 Conclusion
•• How
How prevalent
prevalent are
are the
the problems
problems ofof
monopolies?
monopolies?
–– Monopolies
Monopolies are are common.
common.
–– Most
Most firms
firms have
have some
some control
control over
over their
their
prices
prices because
because of of differentiated
differentiated
products.
products.
–– Firms
Firms with
with substantial
substantial monopoly
monopoly power
power
are
are rare.
rare.
–– Few
Few goods
goods are
are truly
truly unique.
unique.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

Summary
•• AA monopoly
monopoly is is aa firm
firm that
that is
is the
the sole
sole seller
seller
in
in itsits market.
market.
•• ItIt faces
faces aa downward-sloping
downward-sloping demand demand
curve
curve for for its
its product.
product.
•• AA monopoly’s
monopoly’s marginal
marginal revenue
revenue is is always
always
below
below the the price
price ofof its
its good.
good.
•• Like
Like aa competitive
competitive firm, firm, aa monopoly
monopoly
maximizes
maximizes profit profit by by producing
producing the the
quantity
quantity at at which
which marginal
marginal costcost and
and
marginal
marginal revenue
revenue are are equal.
equal.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

Summary
•• Unlike
Unlike aa competitive
competitive firm,
firm, its
its price
price
exceeds
exceeds itsits marginal
marginal revenue,
revenue, so so its
its price
price
exceeds
exceeds marginal
marginal cost.
cost.
•• AA monopolist’s
monopolist’s profit-maximizing
profit-maximizing level level of
of
output
output is
is below
below the
the level
level that
that maximizes
maximizes
the
the sum
sum of
of consumer
consumer and and producer
producer
surplus.
surplus.
•• AA monopoly
monopoly causes
causes deadweight
deadweight losses
losses
similar
similar to
to the
the deadweight
deadweight losses
losses caused
caused
by
by taxes.
taxes.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

Summary
•• Policymakers
Policymakers can can respond
respond to to the
the
inefficiencies
inefficiencies of of monopoly
monopoly behaviour
behaviour with
with
competition
competition laws,laws, regulation
regulation of of prices,
prices, or
or
by
by turning
turning the
the monopoly
monopoly intointo aa
government-run
government-run enterprise.
enterprise.
•• IfIf the
the market
market failure
failure is
is deemed
deemed small,
small,
policymakers
policymakers may may decide
decide toto do
do nothing
nothing at
at
all.
all.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

Summary
•• Monopolists
Monopolists cancan raise
raise their
their profits
profits by
by
charging
charging different
different prices
prices toto different
different
buyers
buyers based
based onon their
their willingness
willingness to to pay.
pay.
•• Price
Price discrimination
discrimination cancan raise
raise economic
economic
welfare
welfare and
and lessen
lessen deadweight
deadweight losses.
losses.

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi

The End

Mankiw et al. Principles of Microeconomics, 2nd Canadian Edi