Transcript Lecture # >> Chapter 15

ECO 1
MONOPOLY AND MONOPOLISTIC
COMPETITION
Erkmen Giray ASLIM (erkmengirayaslim.com)
e-mail: [email protected]
10/22/2015
Department of Economics
Lehigh University
DEFINING MONOPOLY
• What is a monopoly? Give an example.
• Single supplier and we do not observe close substitutes. But how do you
define close substitutes?
• Ignoring actions of other firms– ex. Candles and electric lights.
MORE ON MONOPOLY
• High barriers to entry:
• Government restriction.
• Control of a key resource. Ex. Aluminum Company of America (Alcoa), and
the International Nickel Company of Canada.
• Network externalities. Ex. Twitter, HD television etc.
• Economies of scale (cost advantages) are so large – natural monopoly.
GOVERNMENT RESTRICTION
• Two possibilities:
• Patent or copyright
• Patent: Exclusive right to produce a product for 20 years.
Ex. Microsoft’s patent on Windows.
• Copyright: Exclusive right (70 years after the creator’s death) to
produce and sell a creation. Ex. Books, film etc.
• Public franchise
• Only legal provider of a good or service. Ex. Single provider of
electricity, natural gas, or water.
NATURAL MONOPOLY
• Large economies of scale – long-run average cost falls as
production goes up.
CHOOSING PRICE AND OUTPUT
• Decision rule for maximizing profit :
MR = MC
• Monopolies are price makers. If price makers raise their prices, they will lose some, but
not all, of their consumers. Compare this outcome with perfect competition. We will
come back to this point.
• We have a downward sloping demand and MR curve.
MARGINAL
REVENUE
(MR = ΔTR/ΔQ)
PRICE
QUANTITY
TOTAL
REVENUE
TOTAL
COST
MARGINAL COST
(MC = ΔTC/ΔQ)
$17
3
$51
–
$56
–
16
4
64
$13
63
$7
15
5
75
11
71
8
14
6
84
9
80
9
13
7
91
7
90
10
12
8
96
5
101
11
CHOOSING PRICE AND OUTPUT
MONOPOLY VERSUS PERFECT COMPETITION
MONOPOLY VERSUS PERFECT COMPETITION
BRIEF DISCUSSION ON ANTITRUST LAWS
• Aims to eliminate collusion and promotes competition.
• First important law in the US was called the Sherman Act (1890).
MONOPOLISTIC COMPETITION
• What are the properties of the market?
• Many buyers and sellers
• Low barriers to entry
• Firms do not sell identical products
THE EFFECT OF A PRICE CUT
MAXIMIZING PROFIT
MR = MC
LONG-RUN ANALYSIS
DISCUSSION ON EFFICIENCY
• Productive Efficiency: Producing at the minimum point of ATC curve.
• Perfect competition: 
• Monopolistic competition: 
• Allocative Efficiency: P = MC (MB = MC) – consider consumer preferences.
• Perfect competition: 
• Monopolistic competition: 