Unformatted text preview: Monopoly
How control over supply by a single seller in a market affects prices and quantities sold Pure Monopoly
A single seller of a product that has no close substitutes s Barriers to entry of additional sellers in the market must prevail for a profitable monopoly to be maintained:
3 Patents, secret processes, control of a key input, cost advantage of large scale production, government franchises, special ability or technological advantages that others cannot duplicate, force and coercion OPEC: A Cartel of Petroleum exporting nations
Cartels are groups of firms acting together as if they were a single seller s Cartels can be unstable: as prices are bid up individuals sellers are tempted to sell more than their allotted quotas s To be successful in the long run, cartels must prevent new competing sellers from entering the market.
s DeBeers: A large multinational firm that has monopolized the worldwide sale of diamonds through a cartel-like syndicate in the past. DeBeers now accounts for 40% of diamond sales. At one time it controlled 90% of the market. The demand for a monopolist's product is the market demand
s s To sell more the more P the firm must lower the price The amount the seller chooses to offer for sale will influence the market price of the product
Q For a monopoly marginal revenue is less than price
s s s The monopolist must lower price to sell more It follows that the extra revenue taken in when one more unit is sold is less than the price of that unit The marginal revenue of any given quantity is less than its price Demand MR Profit-maximization under monopoly MC=MR<P
Price and cost $300 $225 Demand MR 0 50,000 Quantity MC AC Consequences of monopolization of a competitive industry: Assuming no cost advantage of large scale production
Price and cost ($ per unit) 2 D=MB 0 100,000 MC=AC Loaves of bread per day Consequences of monopolization of a competitive industry: Assuming no cost advantage of large scale production
Price and cost ($ per unit) 3 2 Monopoly profit= $50,000 per day Social cost of monopoly MC=AC D=MB 0 MR 50,000 100,000 Loaves of bread per day ...
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