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 monopolys 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 monopolists 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 Revenue

and 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 =MC
Monopoly: P > MC
Lerner index of monopoly power:
L = (P MC)/ P
With 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 viceversa.
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-Degree

Price Discrimination

Figure 10.13: The Profit-Maximizing Monopolist

Who Sells in Two Markets (Third degree PD)

Fig. 10.15: Intertemporal price

discrimination

P/Q
PE
PL
DL = ARL
AC = MC

MRE
QE

DE = ARE
QL

MRL

Quantity

Figure 10.16: Peak-Load Pricing

SMC

Rand
Per
unit

P2
A

P
P1

DPP
DOP

QOP QOP

QPP QPP

Output per hour