Monopoly: by Sameer Shah

MONOPOLY
By Sameer Shah
Meaning
A firm is a monopoly if it is the sole seller of its product If its product does not close substitutes. There is barriers to entry: Have 3 main sources
1) a key resource is owned by a single firm 2) the government gives a single firm the exclusive right to produce some good or service 3) the cost of production make a single producer more efficient than a large number of producers.
Cost and Revenue in the shortrun for single price monopolist

Short-run cost curves are U-shaped due to the operation of law of diminishing marginal returns. Because the monopoly firm is the only firm, there is no distinction between market demand and firms demand curve. Monopoly firm faces a negatively sloped market demand curve and sets its own price.
Average and Marginal Revenue

Monopoly firms demand curve is not its marginal revenue curve. Because demand curve is negatively sloped, the monopoly firm must lowers the price to sell an extra unit. It follows that the addition to its revenue resulting from the sale of an extra unit is less the price that it receives form that unit.
Total, Average and Marginal Revenue

Price p = AR 9,10
9,00 8,90 Quantity q 9 10 11
Total revenue TR = p*q

81,90 90,00 97,90
Marginal Revenue MR = TR/q 8,10 7,90
The Effect on Revenue of an Increase in Quantity Sold
p0
p1
Reduction in revenue Addition to revenues
q0
q1
Quantity
Total, Average and Marginal Revenue
Marginal revenue is less than price because price
must be lowered to sell an extras unit. For example, consider the marginal revenue of the eleventh unit. It is total revenue when eleven units are sold (97.90) minus total revenue when 10 units are sold (90.00) which is 7.90. This is less than the 8.90 at which the eleventh unit is sold because the price on all previous 10 units must be cut by 0.10 to raise sales by one unit.
The Effect on Revenue of an Increase in Quantity Sold
Because the demand curve has a negative slope,
marginal revenue is less than price. A reduction of price from p0 to p1 increases sales by one unit from q0 to q1 units. The revenue from the extra unit sold is shown as the medium blue area. To sell this unit, it is necessary to reduce the price on each of the q0 units previously sold. The loss in revenue is shown as the dark blue area. Marginal revenue of the extra unit is equal to the difference between the two areas.
Rules for all profit maximizing firms:

Should the firm produce at all? Rule1: A firm should not produce at all, if for all levels of output, the total variable cost of producing that output exceeds the total revenue derived from selling it or, equivalently, if the average variable cost of producing that output exceeds the price at which it can be sold. How Much should the firm produce? Rule 2: Whenever it is profitable for the firm to produce some output, it should produce the output at which marginal revenue equals marginal cost. Rule 3: An output where marginal cost equals marginal revenue may be either profit maximizing or profit minimizing. Profit maximizing requires that marginal cost be less than marginal revenue at slightly lower outputs and that marginal cost exceed marginal revenue at slightly higher output.
Short-run Monopoly Equilibrium

Marginal Revenue (MR) = Marginal Cost (MC). When the monopoly firm is in profit maximizing equilibrium, equating marginal revenue with marginal cost, both are less than the price it charges for its output.
The Equilibrium of a Monopoly
MC
ATC p0
c
0
AVC
MR 0
D = AR
q0
Quantity
Profit-maximizing quantity
The Equilibrium of a Monopoly
The monopoly produces the output q0 where
marginal revenue equals marginal cost (rule 2). At this output, the price of p0 (which is determined by the demand curve) exceeds the average variable cost (rule 1). Total profit is the profit per unit of p0-c0 multiplied by the output of q0, which is the yellow area.
Discriminating Monopoly or Price Discrimination

Price discrimination is said to exist when the same product is sold at different prices to different consumers. Price discrimination is in practice in railways, Airlines, Electricity, Cinema, by Doctors.
When price discrimination is possible?

1) Market segmentation: It must be possible to divide the market into submarket with different price elasticities of the customers. A different price can then be fixed for each market segment. E,g doctors charging different fees from the rich and poor of the same locality.
When price discrimination is possible?

2) Effective separation of sub- markets: If the the seller can distinguish the areas such that resale between the areas is impossible. Transportation costs, tariff barriers, quotas separate the classes of buyers geographically and make discrimination possible.
Price Output Determination under Discriminating Monopoly
Example
Suppose that the total cost equation (TC) for a monopolist is given by TC = 500 + 20 Q2 Let the demand equation be given by P = 400 -20 Q What is the profit-maximizing price and quantity?

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MONOPOLY

Cost and Revenue in the shortrun for single price monopolist

Average and Marginal Revenue

Total, Average and Marginal Revenue

Total revenue TR = p*q

Marginal Revenue MR = TR/q 8,10 7,90

The Effect on Revenue of an Increase in Quantity Sold

Total, Average and Marginal Revenue

Marginal revenue is less than price because price

The Effect on Revenue of an Increase in Quantity Sold

Because the demand curve has a negative slope,

Rules for all profit maximizing firms:

Short-run Monopoly Equilibrium

The Equilibrium of a Monopoly

The Equilibrium of a Monopoly

The monopoly produces the output q0 where

Discriminating Monopoly or Price Discrimination

When price discrimination is possible?

When price discrimination is possible?

Price Output Determination under Discriminating Monopoly

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