CHAPTER 15

  1. Market Demand = Monopolist's Demand
    The monopolist is the sole seller to the market
    The monopolist's market power (power to set price) comes from barriers to entry.

  2. Monopolist is limited in ability to set price by market demand.

  3. The monopolist maximizes profits as the objective of the firm (this is no different from the perfectly competitive firm).

  4. The monopolist produces that quantity of output where MR = MC (same logic as for the competitive firm).

  5. Once the monopolist decides how much to produce, he prices the product to sell that quantity (references up to the demand curve to read off the price).

  6. There are two kinds of monopoly: (1) the single-price monopoly and (2) the price discriminating monopoly.

  7. For the single-price monopoly, the monopolist sells to the entire market without discrimination. Consumers are arrayed (along the demand curve) according to the marginal benefit they are willing to pay for. If the price to one must be the price to all (when reselling B called secondary markets B between customers is impossible), then marginal revenue declines with increasing sales because the price must be lowered to new, prospective customers farther down the demand curve to lure them in (their perceived benefit of the good is less than those farther up the demand curve); but a lower price to one must mean a lower price to all, in this case.

Therefore, at any output level, P > MR. But since the monopolist has set MR = MC to maximize profits, therefore P > MC. The monopoly output is inefficient, since with a higher price than in competition (where P = MC), consumers buy less, there is less produced and sold, and there is deadweight loss.

Can a monopolist lose money (make losses)? Sure! There is nothing inherent in monopoly which dictates that price will always be greater than unit cost of production (P > ATC). Depending on the relationship between the demand for the product and the costs of production, losses are quite possible. (The sole remaining producer of rotary telephones will go bankrupt, if that's all that he produces. That's why firms are constantly innovating, to avoid getting caught in market change.)

Class Notes | Clint Johnson |  Economics & Finance | Departments & Majors
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