Outcomes• Discuss the assumptions of the monopoly as market structure.• Name and discuss the main sources of barriers to enter. • Discuss the relationship between a monopoly’s demand curve and

MR-curve.• Explain why a monopoly has no supply curve.• Illustrate and explain the output and price level of a monoply in both

the short and long run.• Explain price discrimination by referring to the following: types of

PD, prerequisites for PD, why monopolies practice PD, and the comparison between perfect competition and a monopoly applying PD.

• Explain and illustrate all different types of price discrimination.• Does a monopoly suppress innovation?

What is a Monopoly?

• Monopoly: a market structure in which a single seller of a product with no close substitutes serves the entire market.– A monopoly has significant control over the

price it charges.

Sources Of Monopoly

1. Exclusive Control over Important Inputs(Mining companies)

2. Economies of Scale(Eskom – natural monopoly??)

3. Patents(Medicine)4. Government Licenses or

Franchises(SABC)

The Profit-maximizing Monopolist

• The monopolist’s goal is to maximize economic profit. – In the short-run this means to choose the level of output for which the

difference between total revenue and short-run total cost is greatest.– Price maker (price searcher) = ability to control the price of a product to

a certain degree. – Monopolistic firm = industry– What is the implication for the demand curve?– Demand ≠ MR curve– Why?– For the monopoly = demand curve lies above MR curve.– MR and demand curve has the same origin, but the slope of the MR curve

is twice that of the demand curve.

The Profit-maximizing Monopolist

• Optimal condition for a monopolist: a monopolist maximizes profit by choosing the level of output where marginal revenue equals marginal cost.

Figure 10.5: Changes in Total Revenue Resulting from a Price Cut

Marginal Revenue And Elasticity

• The less elastic demand is with respect to price, the more price will exceed marginal revenue.– Ed < 1, marginal revenue will be negative.– Ed > 1, marginal revenue will be positive.

Figure 10.6: Marginal Revenueand Position on the Demand Curve

Figure 10.7: The Demand Curve and Corresponding Marginal Revenue Curve

Figure 10.9: The Profit-Maximizing Price and Quantity for a Monopolist

Figure 10.10: The Profit-Maximizing Price and

Quantity for Specific Cost and Demand Functions

Measuring monopoly power

Perfect competition: P =MCMonopoly: P > MCLerner index of monopoly power:L = (P – MC)/ PWith perfect competition L = 0, The larger the value of L – the greater the

degree of monopoly power.

A Monopolist Has No Supply Curve

• The monopolist is a price maker.

– When demand shifts rightward elasticity at a given price may either increase or decrease, and vice-versa.

• So there can be no unique correspondence between the price a monopolist charges and the amount she chooses to produce.

• Monopoly has a supply rule, which is to equate marginal revenue and marginal cost.

Price Discrimination

• Price discrimination: a practice where the monopolist charge different prices to different buyers.

• Third-degree price discrimination: charging different prices to buyers in completely separate markets.

• First-degree price discrimination: is the term used to describe the largest possible extent of market segmentation.

Requirements to practice Price Discrimination

Requirements to practice PD– Seller must be a price maker– Differentiate between buyers that are willing to

pay different prices (elasticity of demand)– No re-selling

Figure 10.17: Perfect Price Discrimination

Figure 10.18: The Perfectly Discriminating Monopolist (First degree PD)

Second Degree Price Discrimination

• Second-degree price discrimination:price discrimination where the same rate structure is available to every consumer and the limited number of rate categories tends to limit the amount of consumer surplus that can be captured.

Figure 10.19: Second-DegreePrice Discrimination

Figure 10.13: The Profit-Maximizing Monopolist Who Sells in Two Markets (Third degree PD)

Fig. 10.15: Intertemporal price discrimination

0

PE

P/Q

PL

QLQE

MRE

DL = ARL

MRLDE = ARE

AC = MC

Quantity

Figure 10.16: Peak-Load Pricing

0

Rand Perunit

Output per hour

P

QOP Q’OP QPPQ’PP

P2

P1

DOP

DPP

SMC

A