TOPIC

8
Monopoly Market

Deni6on
The monopoly can be dened as a market that
consists of only one rm or seller.

CHARACTERISTICS OF A MONOPOLY
MARKET

SOURCES OF MONOPOLY POWER

This restric6on is due to several reasons such
as:
- Control over certain produc6on and resources.
- Economies of scale
- Legal barriers (regulatory barriers)
- Licenses
- Patents
- Copyrights

The Rela8onship between Demand Curve and

Marginal Revenue Curve

Total Revenue Curve, Total Costs Curve and

Monopoly Prot

1. Which range of output results in

economic profits?
2. What is the profit maximizing output?
3. What is the profit when 290 units are
produced?

A monopolys total, average, and marginal revenue

Quan6ty of water Price Total revenue Average revenue Marginal revenue
(Q)
(P)
(TR=P Q)
(AR=TR/Q)
(MR=TR/Q)
0 gallons
1
2
3
4
5
6
7
8

$11
10
9
8
7
6
5
4
3

$0
10
18
24
28
30
30
28
24

-
$10
9
8
7
6
5
4
3

$10
8
6
4
2
0
-2
-4

Demand and marginal-revenue curves for a monopoly

Price
$11
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4

Demand
(average revenue)
1

Quantity
of water
Marginal revenue

The demand curve shows how the quantity affects the price of the good. The marginal-revenue
curve shows how the firms revenue changes when the quantity increases by 1 unit. Because the
price on all units sold must fall if the monopoly increases production, marginal revenue is always
8
less than the price.

Marginal Revenue
Marginal revenue is the gradient of the total
revenue curve (TR), while marginal cost is the
gradient of the total costs curve (TC).

Example
P=24-6Q
MR= 24-12Q

Profit maximization for a monopoly

2. . . . and then the demand curve shows the
price consistent with this quantity.

Costs
and
Revenue

Marginal cost
1. The intersection of the marginal-revenue
curve and the marginal-cost curve
determines the profit-maximizing quantity . . .

Monopoly
price

Average total cost

A
Demand

Marginal revenue
0

Q1

QMAX

Q2

Quantity

A monopoly maximizes profit by choosing the quantity at which marginal revenue equals
marginal cost (point A). It then uses the demand curve to find the price that will induce
consumers to buy that quantity (point B).

10

The monopolists profit

Costs
and
Revenue

Marginal cost

Monopoly E
price

Average total cost

Monopoly
profit
Demand

Average
total
cost

C
Marginal revenue

QMAX

Quantity

The area of the box BCDE equals the profit of the monopoly firm. The height of the box
(BC) is price minus average total cost, which equals profit per unit sold. The width of the
box (DC) is the number of units sold.

11

Loss in the short-run

THE MONOPOLY FIRM SHUT DOWN IN

THE SHORT-RUN
the rm will shut down its opera6ons when the equilibrium
price is much lower than the average variable costs.

PRICE DISCRIMINATION

Price
discrimina6on

Price discrimina6on means that monopolist imposes

dierent prices on the same good to dierent
consumers

Fist Degree: based on the price consumers are
willing to pay

Second degree: Charged based on the quan6ty

purchased

Third degree: charged based on dierent

customer groups(segments)

Condi6ons for Price discrimina6on

No feasible realloca6on of the goods
Geographical market segments
Dierent elas6city of demand characters both
markets.

Sales in segmented markets

One of the rule or condi6on that enables
discrimina6on to be carried out is that the
monopolist can segment their output market.
Even when selling takes place in two dierent
markets, the monopolist faces the same total
costs curve. This results in the same marginal
costs for both markets.

First Degree price discrimina6on

First degree price discrimina6on is also referred to as perfect
price discrimina6on. Perfect price discrimina6on means the
monopolist imposes dierent prices for every unit of output
sold.
In this case, the monopolist knows perfectly about the
willingness to pay of each buyer. Therefore in rst degree
price discrimina6on, the monopolist is able to obtain the
en6re consumer surplus available in the market. In this rst
degree price discrimina6on, the demand curve of the
monopoly is also its marginal revenue curve.

For every unit of output from 0 to the Q* unit, the monopolist

imposes dierent prices to the buyers. Prices imposed by the
monopolist are between a and b for every unit of output 0 to
Q*. All consumer surpluses go to the monopolist as prot.

This rst degree price discrimina6on seldom occurs because:
(i) the diculty for the monopolist to know the true amount
each poten6al customer is willing to pay for a par6cular good

and (ii) the possibility of reselling to occur is high.

Second Degree Price Discrimina6on

The second degree price discrimina6on occurs more oben
compared to the rst degree. In the case of second degree
price discrimina6on, the price of good declines with the
increase in the quan6ty of the good purchased. The
monopoly determines dierent prices for every usage group
of dierent units of output.
Second degree price discrimina8on
is eec8ve when the market for
the par8cular good is very wide,
with large number of buyers,
dierent preferences, dierent
levels of income, and dierent
condi8ons.

Third degree price discrimina6on

Third degree price discrimina6on occurs when the
monopoly dieren6ates price according to groups or
classes of consumers, based on their level of income,
or their willingness to pay. Each consumer group has
their own demand curves.

SOCIAL COSTS OF MONOPOLY

In economics, only the perfectly compe66ve market operates
eciently, that is, when it produces output at the point
where price is equivalent to marginal costs (P = MC).

Eciency here refers to the valua6on of buyers towards the
nal unit of output is equivalent to the market value of the
produc6on resources used in producing the par6cular output.

Comparing Monopoly with Perfect

Competition

Monopoly

Perfect
Compe88on

Prot Maximisers

Yes

Yes

Alloca6vely
ecient

No

Yes

Produc6vely
ecient

No

Yes

Price

Prices are higher

under monopoly

Prices are lower

Quan6ty

Quan6ty is lower

Quan6ty is higher