Chapter%2010 - Econ 160 Vardanyan Chapter 10 Monopoly and...

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Econ 160, Vardanyan 1 Chapter 10 Monopoly and Price Discrimination This chapter is devoted to the discussion of a market type that is completely unlike the perfectly competitive setting we studied in the previous chapter. A monopoly is defined as a market in which a single firm serves the entire market . Unlike a firm in a perfectly competitive market, a monopolist has market power, the ability to affect the price of a product . For the monopolist to enjoy its unique position there must be barriers to entry for potential competitors. The following are the reasons why such barriers may exist: Patents . A patent grants an inventor an exclusive right to sell a particular good for a certain period of time , currently 20 years. Licensing . The government might choose to license a single firm to sell a particular product. Network Externalities . This is the case of an increase in the value of a product resulting from an increase in the number of people using it. Controlling a Key Resource . A firm that happens to control a resource that is important in producing a good will be the only one producing it. Natural Monopolies . A natural monopoly occurs when the scale economies in production are so large that only a single firm can survive , i.e. the market can support only one firm. In this chapter we will limit our discussion to the case of unnatural monopolies. We will look at the monopolist’s pricing strategy and its implications for the society as a whole. The Monopolist’s Output Decision The monopolist’s goal is to choose an output level that will maximize its profit, i.e. the difference between total revenue and total cost. We first direct out attention to the monopolist’s revenue. Figure 10.1 provides a hypothetical example. Unlike a firm in a perfectly competitive market, the monopolist is not a price-taker, so it must decrease its price to sell more units of output. Therefore, the monopolist’s marginal revenue ( MR ) is not constant. For example, when the monopolist reduces the price from $12 to $10, there
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