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10.1 A SINGLE-PRICE MONOPOLIST
Cost and Revenue in the Short Run
A monopolist faces the (downward-sloping) market demand
curve.
If the monopolist charges the same price for all units sold, its
total revenue (TR) is:
TR = p x Q
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Average revenue (AR) is total revenue divided by quantity:
AR = TR/Q = (p x Q)/Q = p
Marginal revenue (MR) is the revenue resulting from the sale
of an additional unit of production:
MR = ΔTR/ΔQ
The monopolist must reduce the price to increase sales –
therefore the MR curve is below the demand curve (NOT
simply equal to price anymore).
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10
10
9
8
7
6
5
4
3
2
1
0
Q
TR
0
10
20
30
40
50
60
70
80
90
100
0
90
160
210
240
250
240
210
160
90
0
90
70
50
30
10
-10
-30
-50
-70
-90
9
7
5
3
1
-1
-3
-5
-7
-9
6
Dollars
p
8
MR
ΔTR (ΔTR/ΔQ)
••
4
•
•
•
•
•
•
•
2
30
•
50
-4
-10
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•
•
•
70
•
90 100
Quantity
•
-6
-8
•
•
0
-2 10
AR (demand
curve)
MR
•
•
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Short-Run Profit Maximization
•
c2 = p0
•
Price
c3
c1
ATC3
MC
ATC2
ATC1
•
•
D
MR
Q0
Output
The profit-maximizing
level of output is
where MC = MR.
A profitmaximizing
monopolist has
p > MC.
The size of fixed costs determine whether a monopolist earns
positive economic profits.
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Entry Barriers and Long-Run Equilibrium
Despite incentives to enter, effective entry barriers allow
monopoly profits to persist in the long run.
Entry barriers are of two types:
- “natural” – such as economies of scale
- “created” – by advertising campaigns or
– by government regulation
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APPLYING ECONOMIC CONCEPTS 10-1
Entry Barriers for Irish Pubs
LESSONS FROM HISTORY 10-1
Creative Destruction Through
History
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Joseph Schumpeter (1882-1950)
“What we have to accept is that [monopoly] has come to
be the most powerful engine of progress and in particular
of the long-run expansion of total output not only in spite
of, but to a considerable extent through, this strategy [of
creating monopolies], which looks so restrictive when
viewed in the individual case and from the individual point
of time.”
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Several firms in an industry may form a cartel to maximize
joint profits.
The Effects of Cartelization
Cartelization will
reduce output and
raise price from the
perfectly competitive
levels.
Dollars per Unit
S = MC
pm
pc
•
•
D
Qm Qc
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MR
Output
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Problems That Cartels Face
Cartels tend to be unstable because members have an
incentive to cheat.
S
p1
E
p0
•
•
Q1
MC
ATC
p1
•
p0
D
MR
0
Firm Incentives
Dollars per Unit
Dollars per Unit
Market Equilibrium
Q0
Output
0
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q1
q0
q2
Output
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Any one firm within the cartel has an incentive to cheat.
But if all firms cheat, the price will fall back toward the
competitive level, and joint profits will not be maximized.
Enforcing output restrictions and preventing entry are
difficult. Thus, cartels rarely last for long.
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10.3 PRICE DISCRIMINATION
A producer practices price discrimination by charging different
prices for the same products that have the same cost.
Central to this is that different consumers value the product at
different amounts.
Any firm facing a downward-sloping demand curve can
increase profits if it is able to price discriminate.
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When Price Discrimination Is Possible
1.  When firms have market power.
They control prices
2. When consumers differ in their valuations of the product.
They are willing to pay different prices
3. When firms can prevent arbitrage.
Consumers cannot re-sell the good
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Different Forms of Price Discrimination
Price Discrimination Among Units of Output
A firm captures consumer surplus by charging different prices
for different units sold.
“Perfect” price discrimination transfers all consumer surplus
to the seller.
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Price
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p1
p2
p3
p4
p5
p6
Consumer
surplus
MC
Demand
Q1 Q2 Q3 Q4 Q5 Q6
Quantity
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The Consequences of Price Discrimination
Price discrimination increases firms’ profits (otherwise they
wouldn’t do it!).
For price discrimination by the unit, firms will often increase
their output and overall efficiency will increase.
The effect on consumers is unclear – they may lose consumer
surplus, but they could also gain surplus (if output increases
as a result).
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