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ch12 - Chapter 12 Monopoly Market Power Market power is the...

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Chapter 12 Monopoly Market Power Market power is the ability to influence the market, and in particular the market price, by influencing the total quantity offered for sale. Firms in perfect competition have no market power; a monopoly exercises raw market power. A monopoly is an industry that produces a good or service for which no close substitute exists and in which there is one supplier that is protected from competition by a barrier preventing the entry of new firms. Legal or natural constraints that protect a firm from potential competitors are called barriers to entry . A legal monopoly is a market in which competition and entry are restricted by the granting of a public franchise, government licence, patent, or copyright. Natural barriers to entry create natural monopoly , which is an industry in which one firm can supply the entire market at a lower price than two or more firms can. All monopolies face a tradeoff between price and quantity sold—to sell a larger quantity, the monopoly must charge a lower price. There are two broad monopoly situations: price discrimination and single price. A single-price monopoly is a firm that must sell each unit of its output for the same price to all its customers. Price discrimination is the practice of selling different units of a good or service for different prices.
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A Single-Price Monopoly’s Output and Price Decision A monopolist faces the market demand curve. A monopolist’s demand curve is downward sloping. Table 12.2 shows the market demand schedule for Bobbie’s Barbershop, the sole supplier of haircuts. Price (P) (dollars per haircut) Quantity demanded (Q) (haircuts per hour) Total revenue (TR = P x Q) (dollars) Marginal revenue (MR = TR/ Q) (dollars per haircut) A 20 0 0 …18 B 18 1 18 …14 C 16 2 32 …10 D 14 3 42 …6 E 12 4 48 …2 F 10 5 50 Total revenue is the price multiplied by the quantity sold and marginal revenue is the change in total revenue resulting from a one-unit increase in the quantity sold.
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