Econ 101 Lecture NotesMonopoly 1úEdward KungDecember 29, 20141What is a monopoly?A monopoly is a firm that acts as the sole supplier to a market. As we will see, the mainadvantage that a monopoly has is that it can totally control either the price or the quantityof product in the market (but not both). In other words, they can choose to produce at anypoint along the demand curve.•Sole supplier. The key to being a monopolist is that you are the only producer of acertain good in a certain market. Unlike a competitive firm, a monopolist’s decisionshas influence over both the market price and market quantity of the good.•Choose to produce at any point on the demand curve.It is important to remember thatthe monopolist is still constrained by the market demand curve. It cannot choose toproduce outside the demand curve. A monopolistic producer of bananas cannot charge$100 per banana and still sell a million bananas, because one thing a monopolist cannotdo iscoerceindividuals to buy their product at any price. Therefore, we think of amonopolist as eitherchoosing the price of the good and having quantity determined bythe market, orchoosing the quantity of the good and having price determined by themarket.They cannot choose both.2Why learn about monopolies?First, there are many examples of monopolies in real life.Utilities companies and cablecompanies are often monopolists. Airlines that operate the only flight between two cities, orúTextbook chapter: Nicholson & Snyder Ch. 141
hospitals that are the only hospital in a geographic area can also sometimes be thought ofas monopolies. Understanding how monopolists behave is important for the regulation andmanagement of these companies.Second, monopolistic behavior has consequences for economic efficiency as measured bywhether any gains from trade are left on the table (this will be clear later in the lectures). Thewelfare consequences for monopolistic behavior has been used to justify government regula-tion of monopolies, so an understanding of monopolistic behavior can guide the appropriatetypes of regulation used.Finally, although the section on imperfect competition will probably be more relevantfor this, all firms are to some degree monopolists because most firms’ products are uniqueto some degree. Understanding the strategies employed by monopolists can help understandthe strategies that non-monopolists employ as well.