November 15, 2015

Ch. 25. Monopoly - Summary - Intermediate Microeconomics - Varian

25. Monopoly

In this chapter we  consider an industry structure when there is only one firm in the industry—a monopoly.

A monopoly would recognize that it can influence the market price by its choice of supply quantity and choose that level of price and output that maximized its overall profits.

The difference

Perfect competition: All firms are price takers

Monopoly: The monopolist decides market output and price

24.1 Maximizing Profits

B. Profit maximization

(1) =TR(y)-TC(y)

max  when =0

MR-MC=0  MR = MC

Marginal revenue Marginal cost

(2) TR(y) = p(y)*y

MR(y)= p(y)*1+ y


Perfect competition: MR=price

For a monopolist: MR  price. Why?

(3) Examples

24.4 Inefficiency of Monopoly

 Ineffiency of monopoly

24.6 Natural Monopoly

Natural monopoly - theory of regulation

(1) Definition: Decreasing AC

MC < AC Why?

(2) Examples of natural monopolies

Railroad tracks

Utilities etc

(3) No regulation: MC=MR


MR  price  MC  price

Efficient ressource use when MC=price.


(4) Regulation regimes

(a) Price=MC

 Price< AC

 Need to subsidise the monopolist

 Note: Efficiency loss by taxation

(b) Price=AC


 Efficiency loss?

24.7 What Causes Monopolies?

Important Points

1. When there is only a single firm in an industry, we say the market is a monopoly market and the firm is a monopolist.

2. A monopolist operates at a point where marginal revenue equals marginal cost to get maximum profit for him.. Hence a monopolist charges a price (average price) that is a markup on marginal
cost.  The price or  the size of the markup depends on the elasticity of demand.

3. The monopoly market will produce an inefficient amount of output. The size of the inefficiency can
be measured by the deadweight loss—the net loss of consumers’ and the producer’s surplus.

4. A natural monopoly occurs when a firm cannot operate at an efficient level of output  as per the with marginal cost analysis without losing money. Hence they are to be allowed to operate in a market that has monopoly features and hence allows it to fix price to get profit.  Many public utilities come under the category of  natural monopolies  and are therefore regulated by the government.

5. Whether an industry is competitive or monopolized depends in part on the nature of technology. If the minimum efficient scale is large relative to demand, then the market is likely to be monopolized because only limited number of firms can be in the market and operate at the efficient scale. But if the minimum efficient scale is small relative to demand, there is room for many firms in
the industry, and  a competitive market structure may emerge.

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