04-Monopoly - Monopoly Econ 425 Summer I 2008 Intro A firm...

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Monopoly Econ 425, Summer I 2008
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2 Intro box3 A firm is a monopoly if it is the only supplier of a product for which there is no close substitute. box3 How does a monopolist maximize profit? box3 What are the costs and benefits of a monopoly? How does monopoly compare to competition? box3 How are monopolies created and maintained? box3 What happens to a monopoly if it faces competition from a large number of small, less-efficient firms?
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3 Monopoly behavior Total, Average and Marginal Revenue box3 A monopoly faces a downward-sloping demand; so the more it sells, the lower the price it receives. e.g. p = 6 – Q (inverse demand) TR = p(Q)xQ = (6 – Q)Q = 6Q – Q 2 AR = TR/Q = 6 – Q MR = dTR/dQ = 6 – 2Q 1 2 3 4 5 6 7 Q 0 1 2 3 4 5 6 7 $ AR (inverse demand) MR
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4 Monopoly behavior (2) Profit Maximization MC MR ) ( ) ( ) ( = = Q C Q Q p Q Max Q π MC AC Q $ D = AR MR Q* Example : Inverse demand: p = 40 – Q, Costs: C = 50 + Q 2 . P*
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5 Monopoly behavior (3) box3 The degree of monopoly power is inversely related to the demand elasticity faced by the firm. We can rewrite MR as Then, MR = MC (Lerner index) box3 Monopoly position does not guarantee monopoly power. e.g. Microsoft is a near-monopoly in the market for operating systems, but does it truly have monopoly power? box3 Monopoly power does not guarantee profits.
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