• Monopoly is when a single firm has all the Market Power. Monopolies normally have:
    • High barriers to entry
    • Production in elastic portion of demand
    • Single firm with market power
    • (usually) economies of scale
  • A Natural Monopoly is when it’s hard for firms to achieve break-even without a monopoly market strucutre

Market Demand for Monopolies

MR > 0, i.e. where ε > 1

  • Monopolies face the whole market demand curve.
  • Marginal Revenue (MR) curve will slope down with the same intercept and twice the gradient of the Demand curve.
  • Visual Profit Maximization when (See below for math)
    1. Firm produces (=monopoly quantity)
    2. Market price settles at (=monopoly price)
    3. Firm makes profit of
    4. Deadweight loss is
      1. DWL happens because monopolist increase price more than optimum

Profit Maximization for Monopolies

Profit maximization for monopolies:

  • is the inverse of the Ordinary Demand of goods
  • is the Cost Function that is derived w.r.t
    • ! Not simply !
  • To solve, use Unconstrained Maximization
    1. First Order Condition:
      1. This is the same condition as condition.
      2. ! In third-degree price discrimination, can only be used if is constant.
    2. When elasticity is constant ⇒ Use the Elasticity condition:
      1. Elastic: thus excess profit
      2. Unit elastic: thus zero profit
      3. Inelastic: thus negative profit (monopolist doesn’t produce)

Price Discrimination for Monopolies

First Degree Price Discrimmination

Everybody pays exactly how much they’re willing to pay.

  • Demand curve is same as marginal revenue curve
  • Pareto efficient because there is no deadweight loss; everybody pays exactly as they want to pay, and no extra profit is lost
    • → but the benefit goes to the monopolist only

Two-part Tariff

  • Consumers are made to pay amount A to enter the market
  • Then charge consumers
  • Same as Equivalent Variation

Process of enforcing the tariff

  1. Consumers at utility and only buys good
  2. Firm enters the market and starts selling good at price . The consumer gains utility
  3. Firm realizes they could get more profit. They charge amount to enter the market. Thus the consumer loses amount of .
  4. Consumers are back to , but they’re still buying because they’re just as happy as when they only bought .

You can get market ticket price by either

Third Degree Price Discrimination

  • Idea: Charge differently based on consumer characteristics (=based on Price Elasticity of Demand)
  • ⇒ Split consumers into two groups with elasticity and…
    • If is constant → use the elasticity condition
    • If is not constant → use normal profit maximization:
  • You will eventually get and