CHAPTER 11 - MONOPOLY AND PRICE SEARCHERS
Cartel Case Study: NYC Taxis, p. 436 and 459.
Market with a single (1) seller.
Market where a single firm, or several firms, has (have) 90% or more of the
A group of firms that acts as a monopolist.
How to tell the difference between: a) monopoly power leading to a single dominant firm
(coercive, anti-competitive monopoly) and b) an extremely efficient firm that emerges as an industry
leader and becomes the dominant firm, e.g. Alcoa?
Precondition for a true monopoly:
a) High barriers to entry and b) Monopolist produces a good for
which there is no good substitute.
Problem: what is "high" and what is a “good,” point out the
ambiguity of "monopoly."
Price and Output Decision for Monopolist
(one seller), graph p. 438, Figure 11.1. Being insulated
from competition somehow, the firm can raise price and not attract competition. However, it has to
charge a realistic price based on market demand - even a monopolist faces a downward sloping demand
curve; therefore there is a limit to the price it can charge. At very high prices, the monopolist would
lose all its customers.
Also, note that a monopolist can lose money, e.g. there are thousands of patents that give the inventor
protection from competition (monopoly privilege) for 17 years, but are not commercially viable, either
because ATC is too high or P is too low, and firm would lose money trying to produce the good. See p.
439, Figure 11.2, only if market demand is D
will the monopolist make money.
A profit-maximizing monopolist facing a downward sloping demand curve, and would act like any
other profit-maximizing firm and increase output as long as MR > MC, and would produce Q* where
MR = MC. In Figure 11.1, the monopolist produces Q
* and charges P
*. When producing Q
ATC, and TR > TC, and Econ Profits > 0. The green shaded area in Figure 11.1 represents the
Without barriers to entry, the Pos Econ Profits on p. 438 would attract competition from other
firms, and in the LR profits would get driven to zero as Price was driven down to ATC. However, with
some legal protection against competition (e.g. patent protection), the monopolist could sustain the
economic profits in the LR.
Example of possible "monopolies":
ECN 469: Managerial Economics
Professor Mark J. Perry