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Market Structure
Monopoly
Veena Pailwar
Professor
1
IMT Nagpur
Monopoly
Single firm serves the relevant market
No Substitutes
No new entries possible
The demand for the firms product is the market
demand curve
Firm has control over price: Monopoly is price
maker
Created Sources
Patents and other legal
barriers
(like licenses)
Exclusive access to a
essential resource (input)
(raw material purchase
etc.)
Collusion
(Cartels: formal or informal)
3
Managing a Monopoly
Market power permits
you to price above MC
Is the sky the limit?
No. How much you sell
depends on the price
you set!
MR
Demand
Q
5
MC
ATC
Profit
PM
ATC
D
QM
MR
Q
6
A Numerical Example
Given estimates of
P = 10 - Q
C(Q) = 6 + 2Q
Optimal output?
MR = 10 - 2Q
MC = 2
10 - 2Q = 2
Q = 4 units
Optimal price?
P = 10 - (4) = Rs6
Maximum profits?
An Useful
Formula
Whats the MR if a firm
faces a linear demand
curve for its product?
P(Q) = a - bQ
MR = a - 2bQ
$
ATC>MC, P>MR, P>MC, P>ATC
SMC
LATC
k
SATC
D
Q
o
Qe
MRthe long run
Supernormal profits may be earned even in
depends on how contestable the market is
10
Things Change
Demand may go down
Cost could increase
In an attempt to keep the potential
competitors out, the monopolist may lower
its price to near its average cost
Rent seeking: an attempt to maintain its
monopolistic position by influencing the
political processes-e.g., zoning laws
Closer substitutes may emerge
12
LATC
SATC
MC
Qe
L-R Zero Economic Profit
MR
13
Deadweight loss of
monopoly
15
Price discrimination.
The tradeoff associated with patents and copyright deadweight loss in consumption versus possible new
products.
16
MC
S
Pm
Pc
D
Qm
Qc
MR
17