In this chapter you will learn why some markets have only one seller, analyze how a monopoly determines the quantity to produce and the price to charge, see how the monopoly’s decisions affect economic well-being, consider the various public policies aimed at solving the problem of monopoly, see why monopolies try to charge different prices to different customers. | 15 Monopoly While a competitive firm is a price taker, a monopoly firm is a price maker. A firm is considered a monopoly if . . . it is the sole seller of its product. its product does not have close substitutes. WHY MONOPOLIES ARISE The fundamental cause of monopoly is barriers to entry. WHY MONOPOLIES ARISE Barriers to entry have three sources: Ownership of a key resource. The government gives a single firm the exclusive right to produce some good. Costs of production make a single producer more efficient than a large number of producers. Monopoly Resources Although exclusive ownership of a key resource is a potential source of monopoly, in practice monopolies rarely arise for this reason. Government-Created Monopolies Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets. Government-Created Monopolies Patent and copyright laws are two important examples of how government creates a monopoly to serve the public . | 15 Monopoly While a competitive firm is a price taker, a monopoly firm is a price maker. A firm is considered a monopoly if . . . it is the sole seller of its product. its product does not have close substitutes. WHY MONOPOLIES ARISE The fundamental cause of monopoly is barriers to entry. WHY MONOPOLIES ARISE Barriers to entry have three sources: Ownership of a key resource. The government gives a single firm the exclusive right to produce some good. Costs of production make a single producer more efficient than a large number of producers. Monopoly Resources Although exclusive ownership of a key resource is a potential source of monopoly, in practice monopolies rarely arise for this reason. Government-Created Monopolies Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets. Government-Created Monopolies Patent and copyright laws are two important examples of how government creates a monopoly to serve the public interest. Natural Monopolies An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. Natural Monopolies A natural monopoly arises when there are economies of scale over the relevant range of output. Figure 1 Economies of Scale as a Cause of Monopoly Copyright © 2004 South-Western Quantity of Output Average total cost 0 Cost HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS Monopoly versus Competition Monopoly Is the sole producer Faces a downward-sloping demand curve Is a price maker Reduces price to increase sales Competitive Firm Is one of many producers Faces a horizontal demand curve Is a price taker Sells as much or as little at same price Figure 2 Demand Curves for Competitive and Monopoly Firms Copyright © 2004 South-Western Quantity of Output Demand (a) A Competitive Firm ’ s Demand Curve (b) A Monopolist ’ s Demand Curve 0 Price Quantity of Output 0 Price Demand A Monopoly’s Revenue Total
