CHAPTER 9
MONOPOLY
In this chapter, you will find:
Learning Outcomes
Chapter Outline with PowerPoint Script
Chapter Summary
Teaching Points (as on Prep Card)
Solutions to Problems Appendix
Experiential Assignment
INTRODUCTION
In the previous chapter, the assumptions, logic, and implications of perfect competition were covered.
This chapter examines monopoly by contrasting it with pure competition. Perhaps the most important
distinction is that while there are no barriers to entry under perfect competition, under monopoly there is a
LEARNING OUTCOMES
9-1 List three barriers to entry and explain how each can help create market power.
A monopolist sells a product with no close substitutes. Short-run economic profit earned by a
9-2 Distinguish marginal revenue and average revenue for a monopolist, and explain why marginal
revenue is less than average revenue.
Since a monopolist is the sole supplier of a product with no close substitutes, a monopolist’s
9-3 Determine the profit-maximizing or loss-minimizing production level for a monopolist.
9-4 Summarize what causes the deadweight loss of monopoly.
If costs are similar, a monopolist charges a higher price and supplies less output than does a perfectly
Chapter 9 Monopoly 132
9-5 Outline the factors that could cause the deadweight loss of monopoly to be lower or higher than
expected.
Deadweight loss can be difficult to estimate. If economies of scale are substantial enough, a monopo-
list might be able to produce output at a lower cost per unit than could competitive firms. The price,
9-6 Explain why a firm with market power might decide to charge different groups different prices.
To increase profit through price discrimination, the monopolist must have at least two identifiable
groups of customers, each with a different price elasticity of demand at a given price, and must be
able to prevent customers charged the lower price from reselling to those charged the higher price. A
CHAPTER OUTLINE WITH POWERPOINT SCRIPT
USE POWERPOINT SLIDES 2-5 FOR THE FOLLOWING SECTION
Barriers to Entry: Restrictions on entry of new firms into an industry.
Legal Restrictions
• Patents and Invention Incentives
USE POWERPOINT SLIDES 6 FOR THE FOLLOWING SECTION
Economies of Scale: Natural monopolies emerge from the nature of costs.
• Downward-sloping long-run average cost curve.
USE POWERPOINT SLIDES 7-8 FOR THE FOLLOWING SECTION
Control of Essential Resources: Source of monopoly power is a firm’s control over some resource
critical to production.
USE POWERPOINT SLIDES 9 FOR THE FOLLOWING SECTION
Revenue for the Monopolist
USE POWERPOINT SLIDE 10 FOR THE FOLLOWING SECTION
The Gains and Loss from Selling One More Unit: additional units lead to a gain from selling one more
Chapter 9 Monopoly 133
USE POWERPOINT SLIDES 11-15 FOR THE FOLLOWING SECTION
Revenue Schedules: As output increases, total revenue increases, reaches a maximum and then declines.
• Marginal revenue: As price declines, marginal revenue falls because:
– The amount of revenue received from selling an additional unit declines.
USE POWERPOINT SLIDES 16-19 FOR THE FOLLOWING SECTION
The Firm’s Costs and Profit Maximization: The monopolist is a “price maker.”
Profit Maximization:
• Total Revenue Minus Total Cost: Production rate where total revenue exceeds total cost by the
greatest amount.
USE POWERPOINT SLIDES 20-23 FOR THE FOLLOWING SECTION
Short-Run Losses and the Shutdown Decision: Continue producing if the price is greater than average
USE POWERPOINT SLIDES 24-27 FOR THE FOLLOWING SECTION
Monopoly and the Allocation of Resources
Price and Output Under Perfect Competition: Marginal benefit that consumers derive from a good
equals the marginal cost of producing that good. The market is allocatively efficient and maximizes social
welfare.
USE POWERPOINT SLIDES 28-29 FOR THE FOLLOWING SECTION
Problems Estimating the Deadweight Loss of Monopoly
Why the Deadweight Loss of Monopoly Might Be Lower: Monopolists might be able to produce output
at a lower cost than competitive firms. However, fear of public scrutiny and political pressure may not let
monopoly price rise as high as it could.
USE POWERPOINT SLIDES 30-36 FOR THE FOLLOWING SECTION
Chapter 9 Monopoly 134
Price Discrimination
• Price discrimination: Charging different prices for the same output to different groups of consumers.
Conditions for Price Discrimination: The monopolist must:
• Be a price maker.
• Identify at least two classes of consumers with different price elasticities of demand.
• Be able, at little cost, to charge each group a different price for essentially the same product.
• Have a way to prevent those consumers charged the lower price from reselling to those who pay the
USE POWERPOINT SLIDES 37-38 FOR THE FOLLOWING SECTION
Perfect Price Discrimination: The Monopolist’s Dream
• Charge a different price for each unit of a good.
• Converts every dollar of consumer surplus into economic profit.
CHAPTER SUMMARY
A monopolist sells a product with no close substitutes. Short-run economic profit earned by a monopolist
can persist in the long run only if the entry of new firms is blocked. Three barriers to entry are (a) legal
restrictions, such as patents and operating licenses; (b) economies of scale over a broad range of output;
and (c) control over a key resource.
If the monopolist can at least cover variable cost, profit is maximized or loss is minimized in the short run
by finding the output rate that equates marginal revenue with marginal cost. At the profit-maximizing
quantity, the price is found on the demand curve.
Chapter 9 Monopoly 135
To increase profit through price discrimination, the monopolist must have at least two identifiable groups
of customers, each with a different price elasticity of demand at a given price, and must be able to prevent
customers charged the lower price from reselling to those charged the higher price.
TEACHING POINTS
1. Monopoly is always an interesting topic to discuss in class. The text takes the view that monopoly
refers to a single seller of a good. Some economists prefer to use the term more loosely because a sin-
2. To fully appreciate the difference between monopoly and competitive profit maximization solu-
tions, it is important to recognize notable similarity—both maximize profits where marginal revenue
3. Sometimes students have the idea that monopolies are immune to losses. Remind them that even
monopolies may have to shut down in the short run and go out of business in the long run.
4. Students often have the idea that monopoly is bad because of the excessive profits that a monopoly
makes. Actually, what is bad is the deadweight loss created as the monopolist reduces output below
5. The latter part of the chapter is concerned with price discrimination. For example, senior citizens
are often given discounts on meals at restaurants, students are given discounts on movie tickets,
and so on. You might encourage students to find their own examples of price discrimination. It is
tempting to argue that price discrimination is bad because it flies in the face of our view of fairness.
However, it is easy to show that overall resource allocation is actually improved when a monopolist
is allowed to price discriminate because such behavior leads to an increase in output. Thus, the argu-
Chapter 9 Monopoly 136
SOLUTIONS TO PROBLEMS APPENDIX
1. (Barriers to Entry) Explain how economies of scale can be a barrier to entry.
If a firm’s long-run average cost curve slopes downward throughout the range of market
2. (Barriers to Entry) Identify the other two barriers to entry and explain how they block new firms
from this market.
Legal restrictions and control over an essential resources are the other two barriers to entry.
3. (Monopoly) Suppose that a certain manufacturer has a monopoly on the sorority and fraternity
ring business (a constant-cost industry) because he has persuaded the “Greeks” to give it
exclusive rights to their insignia.
a. Using demand and cost curves, draw a diagram depicting the firm’s profit-maximizing price
and output level.
b. Why is marginal revenue less than price for this firm?
c. On your diagram, show the deadweight loss that occurs because the output level is
determined by a monopoly rather than by a competitive market.
d. What would happen if the Greeks decided to charge the manufacturer a royalty fee of $3 per
ring?
Chapter 9 Monopoly 137
a.
4. (Short-Run Profit Maximization) Answer the following questions on the basis of the
monopolist’s situation illustrated in the following graph.
a. At what output rate and price does the monopolist operate?
b. In equilibrium, approximately what is the firm’s total cost and total revenue?
c. What is the firm’s economic profit or loss in equilibrium?
a. It will produce 100 units of output and sell them at a price of $10 each
Chapter 9 Monopoly 138
5. (Monopoly and the Allocation of Resources) What is the problem with monopoly? Compare
monopoly to the benchmark of perfect competition established in the previous chapter. Use the
exhibit below for reference.
When there is only one firm in a market, the price that firm charges determines the market
6. (Allocative and Distributive Effects) Why is society worse off under monopoly than under
perfect competition, even if both market structures face the same constant long-run average cost
curve?
Part of the reduction in consumer surplus under monopoly is considered a deadweight loss
7. (Welfare Cost of Monopoly) Explain why the welfare loss of a monopoly may be smaller or
larger than the loss shown in the exhibit above.
The loss may be smaller because a monopolist may have economies of scale that are not
8. (Conditions for Price Discrimination) List three conditions that must be met for a monopolist to
price discriminate successfully.
First, the firm must be a price maker—that is, it must have some control over its price. Second,
9. (Price Discrimination) Explain how it may be profitable for South Korean manufacturers to sell
new autos at a lower price in the United States than in South Korea, even with transportation
costs included.
This is a simple price discrimination problem. One need only assume that the demand elasticity
Chapter 9 Monopoly 139
10. (Perfect Price Discrimination) Why is the perfectly discriminating monopolist’s marginal
revenue curve identical to the demand curve it faces?
The perfectly discriminating monopolist can charge a different price for each unit as output
EXPERIENTIAL ASSIGNMENT
1. In many large U.S. cities, monopoly owners of sports franchises have been lobbying local govern-
ments for new publicly financed sports stadiums. Is this a form of rent seeking? Have students go to