A monopoly is one firm producing a good without close substitutes
The firm is a price-setter because they can choose to produce at any point along the demand curve
Have abnormal profits in the long-run
Short-run profits as well
Can have normal profits or abnormal profits where the price is above the average costs
The demand curve for the market is the same for a monopoly because there are no other providers of the good
The difference is that the marginal revenue curve is below the demand curve
Assumptions:
Barriers to entry/exit: this is due to the lack of consumer substitutes that are available
Technical barriers: the firm has decreasing marginal costs over with the market demand
Legal barriers: intellectual property rights like patents and copyrights
Creating barriers: many firms try to create firms so they can create a monopoly-like market structure
Unique product (non-homogenous goods)
The firm is a short-run profit maximizer where MC=MR
Disadvantages:
The sum of PC market's MC curves= the supply-curve on the PCM, but in a monopoly it is just the MC curve
No benefits of scale
Higher price but lower output= less consumer sovereignty
Deadweight loss: welfare loss to society, were both the producers and consumers lose a portion of their surplus
Predatory pricing: gets rid of the rivals by setting high prices so it's harder for them to enter the market
Limits competition: monopolies have unique products with many barriers to entry and/or exit to the market, limiting the amount of firms that can enter
High costs and less innovation
Advantages:
Economies of scale: Profit-maximization at a lower price with higher output
Natural monopolies: the economies of scale are more efficient to have one firm produce the good; higher fixed costs and high start-up costs
Government-run monopolies: public and merit goods are priced at AC or MC
More research and development: due to having abnormal profits; could increase consumer choice and there would be more societal benefits in the long-run
Creative destruction: would force other firms to produce new and better substitute goods to compete, so competitive markets could improve
Higher prices and lower prices: negative externalities would decrease
Natural Monopoly:
When the barriers for other firms entering the market are in a way, built-in because of the environment, infrastructure, or the nature of the good
Will have very large benefits of scale: the monopoly firm to continually undercut the potential rivals thus prohibiting them from entering the market
Example: transportation, the bus services have high fixed costs since it costs the same to drive an empty bus or a full bus
Efficiency:
Not allocatively efficient: the optimal distribution of resources where there is maximum efficiency; P=MC
Usually not productively efficient either- the output level set by MC=MR could mean that the firm produces when AC(min) is not reached
Diagrams:
Monopoly
Socially Optimal and Fair Returns Prices in a Monopoly
Definition:
Assumptions:
Natural Monopoly:
Efficiency:
- Usually not productively efficient either- the output level set by MC=MR could mean that the firm produces when AC(min) is not reached
Diagrams:Example: