MONOPOLY FINAL

Monopoly is a situation in which a market

contains a single seller.
There is no distinction between the industry and
firm in a monopolistic market.
The monopolistic firm is the industry: it has no
competitors.
A monopolists individual demand curve
possesses the same general properties as the
industry demand curve for a perfectly
competitive market.
 It is the aggregate of the demand curves of
individual consumers and is assumed to be
negatively sloped.
The quantity of her sales is a single-valued
function of the price which she charges:
q =f (p) where dp/dq <0.
A major difference between a monopolist and
a perfect competitor is that the monopolists
price decreases as she increases her sales.
 A perfect competitor accepts price as given
and maximizes profit with respect to
variations of her output level. A monopolist
may maximize profit with respect to variation
of either output or price.
 The De Beers monopoly of South Africa was
created in 1880s by Cecil Rhodes, a British
Businessman. By 1880,mines in S. Africa
already dominated the worlds supply of
diamonds. There were however, many mining
companies all competing with each other.
During 1880s Rhodes bought the great
majority of those mines and consolidated into
a single company, De Beers.
 By 1889, De Beers controlled almost all of the
worlds supply of diamond production.
Cecil Rohdes became a monopolist.
A producer is a monopolist if it is the sole
supplier of the good that has no close
substitute.
 Sources of Monopoly
1.Control of a scarce resource or input: A
monopolist that controls a resource or input
crucial to an industry can prevent other firms
from entering its market.
Cecil Rhodes created DE Beers monopoly by
establishing control over the mines that
produced great bulk of worlds diamonds.
 Increasing Returns to Scale (IRTS): In an
industry characterised by IRTS, larger
companies are more profitable and drive out
smaller ones.
For the same reason, established companies
have cost advantages over any potential
entrant---a potent barrier to entry.
So IRTS can both give rise to and sustain
monopoly
 A monopoly created and sustained by IRTS is
called natural monopoly.
The defining characteristic of natural
monopoly is that it possesses IRTS over the
range of output that is relevant for the
industry.
 Technological superiority: A firm that
maintains a consistent technological
advantage over potential competitors can
establish itself as a monopolist.

Patent and copyright: A patent gives an

inventor the sole right to make , use or sell
that invention for a period that in most
countries lasts between 16 to 25 years.
 A copyright gives the creator of a literary or
artistic work, the sole right to profit from that
work, usually for a period equal to creators
lifetime plus 70 years.
Short-run equilibrium of a monopolist

SMC

A D SAC

B C
E

MR
 Now the question is whether it is possible to
earn supernormal profits for a monopolist
even in the long run?
The answer is YES. Because of blocked entry, a
monopolist is able to earn supernormal profits
even in the long-run.
 Inefficiency in monopoly.
It is often said that a monopolist creates
inefficiency in the economy by producing less
than a perfectly competitive firm.
Deadweight loss in monopoly

Pm MC
B f
Pc C
e
D

Qm Qc
MR
 Price Discrimination in Monopoly
Selling different units of output at different prices is called price
discrimination.
First degree PD means that the monopolist sells different units of
output for different prices and these prices may differ from person
to person. Sometimes known as perfect PD.
The company charges the consumer the maximum price that
individual is willing to pay for that product. This extracts all the
consumer surplus and earns the firms highest possible profit. The
CS will be zero.
Second degree PD means that the monopolist sells different units
of output for different prices but every individual who buys the
same amount of the good pays the same price. Thus prices differ
across the units of the good but not across people. EX: bulk
discounts.
 Third degree PD occurs when the monopolist
sells output to different people for different
prices, but every unit of output sold to a given
person sells for the same price.
EX. Senior citizen discounts, student discounts.