Monopoly
• Single seller – 100% of the market (may exert
same market power with >25%)
• Barriers to entry keep competition to a minimum
• Firms control price (price setter) and earn
super-normal profits
• Natural monopoly may exist in some industries
• Firms practise price discrimination
Barriers to Entry (a reminder):
1. High Start-Up Costs
2. Economies of Scale
3. Limit Pricing
4. Control of Outlets or Suppliers
5. Brand Loyalty – sunk costs
6. Patents, Copyrights, Licensing
7. Natural monopoly characteristics
(enormous infrastructure)
Monopoly – The Curves!
Price £
MC
AC
P profit max
AC
MR
Q
profit max
AR = D
Quantity
Profit maximising output is where MC = MR (once output is set,
P determined by the demand curve)
AC < AR (P) at profit maximising output
Therefore, supernormal profits exist (however losses are
possible if demand falls or costs rise)
Monopoly Efficiency
Allocative
Efficiency
Productive
Efficiency
Dynamic
Efficiency
X-inefficiency





Since P ≠ MC; (P>MC)
Q is not at min AC.
Little incentive to decrease costs
since price can be increased
May choose to constantly improve
to keep out potential competitors
Without competition, firms can
become very bureaucratic & too
management heavy – slowing
things down
Natural Monopoly
Price £
P profit max
AC
AC
MR
Q
profit max
MC
AR = D
Quantity
AC falls constantly (constant increasing returns to scale due to high
sunk costs)
Profit max. output where MR = MC
At Q profit max, P is determined by the demand curve
P (AR) > AC, therefore supernormal profits
Price Discrimination
• Firms charge different prices to different groups
of consumers for the same product (Eg. peak/off
peak train fares, same clothes/different shop)
• Monopoly power must be great enough to not
risk being undercut by rivals
• Must be able to prevent re-selling of product in
2nd hand market (arbitrage)
• Groups must have different elasticities of
demand (the more inelastic, the higher the price)
Price Discrimination – The Curves
Price
Market A
Whole Mkt
Market B
MC
AC
PA
PB
MRB
MRA ARA
QA
ARB
QB
MR
Q
profit max
P in each market is determined by the demand curve
Q in each market is determined by where MC = MR
Firms try to capture all the consumer surplus, turning it into producer
surplus
Quantity
Monopoly Bad
Monopoly Good
Consumers face higher
prices & less choice
(↓ consumer surplus & ↓
consumer welfare)
Lower income
consumers may be
priced into the market by
price discrimination
Firms may have no
incentive to innovate or
become more efficient
Large firms may be able
to take advantage of
Economies of Scale
New market entrants
may be stifled by
monopoly power,
reducing long-term
progress
Large firms may be
more internationally
competitive improving
exports for the country
A note about shifting cost
curves…
• Since MC is only related to variable costs,
MC will only shift if VCs change
So…
- If Fixed Costs change, shift only the AC
curve
- If Variable Costs change, shift both AC
and MC curves