2. Barriers to Entry
2
A monopoly is the sole supplier of a
product with no close substitutes
The most important characteristic of a
monopolized market is barriers to entry
new firms cannot profitably enter the
market
Barriers to entry are restrictions on the
entry of new firms into an industry
Legal restrictions
Economies of scale
Control of an essential resource
3. Legal Restrictions
3
One way to prevent new firms from
entering a market is to make entry illegal
Patents, licenses, and other legal
restrictions imposed by the government
provide some producers with legal
protection against competition
4. Patent and Invention Incentives
4
A patent awards an inventor the exclusive
right to produce a good or service for fixed
number of years
Patent laws
Encourage inventors to invest the time and
money required to discover and develop new
products and processes
Also provide the stimulus to turn an invention
into a marketable product, a process called
innovation
5. Licenses and other Entry
Restrictions
5
Governments often confer monopoly
status by awarding a single firm the
exclusive right to supply a particular good
or service
Broadcast TV and radio rights
State licensing of hospitals
Cable TV and electricity on local level
6. Economies of Scale
6
A monopoly sometimes emerges naturally
when a firm experiences economies of
scale as reflected by the downward-
sloping, long-run average cost curve
In these situations, a single firm can
sometimes supply market demand at a
lower average cost per unit than could two
or more firms at smaller rates of output
7. Natural Monopoly
7
Because such a monopoly emerges from
the nature of costs, it is called a natural
monopoly
A new entrant cannot sell enough output
to experience the economies of scale
enjoyed by an established natural
monopolist entry into the market is
naturally blocked
8. Control of Essential Resources
8
Another source of monopoly power is a
firm’s control over some nonreproducible
resource critical to production
Professional sports teams try to block the
formation of competing leagues by signing the
best athletes to long-term contracts
Alcoa was the sole U.S. maker of aluminum for a
long period of time because it controlled the
supply of bauxite
China is the monopoly supplier of pandas
DeBeers controls the world’s diamond trade
9. Local Monopolies
9
Local monopolies are more common than
national or international monopolies
However, as a rule long-lasting
monopolies are rare because, as we will
see, a profitable monopoly attracts
competitors
10. Revenue for the Monopolist
10
Because a monopoly, by definition,
supplies the entire market, the demand for
goods or services produced by a
monopolist is also the market demand
The demand curve for the monopolist’s
output therefore slopes downward,
reflecting the law of demand
As seen in the following discussion this
has important implications for revenues
11. Firm’s Costs and Profit
Maximization
11
The monopolist can choose either the price
or the quantity, but choosing one
determines the other
Because the monopolist can select the price
that maximizes profit, we say the
monopolist is a price maker
More generally, any firm that has some
control over what price to charge is a price
maker
12. Short-Run Losses and the Shutdown
Decision
12
A monopolist is not assured of profit
The demand for the monopolists good or
service may not be great enough to generate
economic profit in either the short run or the
long run
In the short run, the loss-minimizing
monopolist must decide whether to
produce or to shut down
If the price covers average variable cost, the
firm will produce
If not, the firm will shut down, at least in the
short run
13. Monopolist’s Supply Curve
13
The intersection of a monopolist’s
marginal revenue and marginal cost curve
identifies the profit maximizing quantity,
but the price is found on the demand curve
Thus, there is no curve that shows both
price and quantity supplied there is no
monopolist supply curve
14. Long-Run Profit Maximization
14
For a monopoly, the distinction between
the long and short run is not as important
If a monopoly is insulated from
competition by high barriers that block
new entry, economic profit can persist in
the long run
However, short-run profit is no guarantee
of long-run profit
15. Long-Run Profit Maximization
15
A monopolist that earns economic profit in
the short-run may find that profit can be
increased in the long run by adjusting the
scale of the firm
Conversely, a monopoly that suffers a loss
in the short run may be able to eliminate
that loss in the long run by adjusting to a
more efficient size
16. Price and Output Comparison
16
Purpose here is to compare monopoly
using the benchmark established in our
discussion of perfect competition
When there is only one firm in the industry,
the industry demand curve becomes the
monopolist’s demand curve the price
the monopolist charges determines how
much gets sold
Exhibit 8 provides our comparison
17. Why the Welfare Loss Might Be Lower
17
If economies of scale are extensive
enough, a monopolist may be able to
produce output at a lower cost per unit
than could competitive firms
If this is true, the price or at least the cost
of production could be lower under
monopoly than under competition
18. Why the Welfare Loss Might Be
Lower
18
The welfare loss is lower because the
monopoly may also overstate the true cost
of monopoly because monopolists may, in
response to public scrutiny and political
pressure, keep prices below what the
market could bear
Finally, a monopolist may keep the price
below the profit maximizing level to avoid
attracting new competitors
19. Why the Welfare Loss Might Be
Higher
19
Another line of thought suggests that the
welfare loss of monopoly may, in fact, be
greater
If resources must be devoted to securing
and maintaining a monopoly position,
monopolies may involve more of a welfare
loss
20. Why the Welfare Loss Might Be
Higher
20
Consider, for example, radio and TV
broadcasting rights confer on the recipient
the exclusive right to use a particular band
of the scarce broadcast spectrum
In the past, these rights have been given
away by government agencies to the
applicants deemed most deserving
21. Why the Welfare Loss Might Be
Higher
21
Because these rights are so valuable,
numerous applicants spend millions on
lawyers’ fees, lobbying expenses, and
other costs associated with making
themselves appear the most deserving
The efforts devoted to securing and
maintaining a monopoly position are
largely a social waste because they use up
scarce resources but add not unit to
output
22. Price Discrimination
22
A monopolist can sometimes increase
economic profit by charging higher prices
to customers who value the product more
The practice of charging difference prices
to different customers when the price
differences are not justified by differences
in cost is called price discrimination
23. Conditions for Price
Discrimination
23
Conditions
The demand curve for the firm’s product must
slope downward the firm has some market
power and control over price
There are at least two groups of consumers for
the product, each with a different price elasticity
of demand
The producer must be able, at little cost, to
charge each group a different price for
essentially the same product
The producer must be able to prevent those who
pay the lower price from reselling the product to
those who pay the higher price
24. Examples of Price
Discrimination
24
Like faces of Businessmen unpredictable
yet urgent demands for travel and
communication, and because employers
pay such expenses, businesspeople are
less sensitive to price than householders
Telephone companies are able to sort out
their customers by charging different rates
based on the time of day
