Chapter Outline

Monopoly is a market structure in which a single seller of a product with no close substitutes serves the entire market.
1. Monopoly exists when a firm has control over key inputs, faces economies of scale in production, owns a patent, or secures a government license.
2. Profit maximization is usually assumed in monopoly models.
Total profit peaks where the gap between total cost and total revenue is the greatest or where marginal cost equals marginal revenue.
1. Marginal revenue is always less than price because of the loss absorbed when price is lowered for all output in order to sell more units.
2. Marginal revenue is positive when demand is elastic and negative for inelastic portions of the demand curve.
3. Marginal revenue has twice the slope of a linear demand curve.
A graphical analysis of short-run profit maximization shows the profits or losses realized by equating the marginal cost and marginal revenue curves.
1. Because marginal cost is always positive, the profit maximizing output will always be where demand is elastic.
2. The profit-maximizing markup is the difference between price and marginal cost as a percentage of the price.
3. Monopolists shut down if their price falls below the average variable cost curve.
4. Because monopolists are not price takers, they do not have a specific supply curve of output.
In the long run a monopolist will produce where long-run marginal cost equals marginal revenue.
There are four kinds of price discrimination.
1. Third-degree price discrimination occurs when different prices are charged to buyers in totally separate markets.
2. First-degree price discrimination occurs when each unit of output is sold at a different price so that all the consumer surplus goes to the seller.
3. Second-degree price discrimination occurs when the seller prices the first block of output at a higher price than subsequent blocks of output.
4. The hurdle method of price discrimination exists when the seller offers a lower price coupled with an inconvenience that consumers with a high opportunity cost of time prefer to avoid.
There is deadweight loss to society when a single-price monopoly profit maximizes.
When average cost continually falls, a natural monopoly exists, and at least five options should be considered.
1. The government could own and operate the company.
2. The government could regulate the private owners.
3. Exclusive contracts could be awarded to foster competition.
4. Antitrust laws could break up the monopoly.
5. A laissez-faire policy could be adopted if the disease is less harmful than the cure.
Monopolies do not have a great incentive to suppress innovation.

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