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Unformatted text preview: Monopoly and Regulation Pure monopoly is a situation where one firm has 100 percent of market share. A dominant firm is one with greater than 50 percent of market share, and no close competitor. A model of monopoly will assume there is a welldefined market with one single supplier. We’ll model this as the monopolist “setting” the price p and consumers will demand the quantity D ( p ) By producing q , we will denote costs as C ( q ). Monopoly and Regulation We will treat the monopolists decision as selecting the optimal output level i.e that which maximizes profit. As we know, profit maximization occurs when marginal revenue is equal to marginal cost. Recalling that revenue equals pq , and solving the first order condition, we get the elasticity rule: p MC p = 1 where = dD dp p q denotes the elasticity of demand. So it follows that a monopolist sets a pricecost margin that is greater the lower is price elasticity of demand. Dominant Firms Pure monopolies are very rare....
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This note was uploaded on 10/15/2008 for the course ECON 188 taught by Professor Shakeebkhan during the Fall '08 term at Duke.
 Fall '08
 ShakeebKhan
 Monopoly

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