Monopoly Market Structure Lecture Notes

Introduction

• Focus on the market structure of monopoly.
• Standard analysis: Characteristics, diagram of firm behavior, efficiency analysis.

Characteristics of Monopoly

• Single Firm Dominance: One firm, one seller dominates the market.
• Types of Monopoly:
  • Pure Monopoly: One firm with 100% market share (theoretical extreme).
  • Monopoly Power: More realistic, firm has more than 25% market share (legal monopoly).
• Product Differentiation: Unique products, firm is a price maker.
• Barriers to Entry/Exit: High barriers allow supernormal profits to persist.
• Market Information: Imperfect information keeps firms out.
• Profit Maximization: Firm produces where Marginal Revenue (MR) = Marginal Cost (MC).

Monopoly Firm Behavior Diagram

• Revenue Curves:
  • Downward sloping: Average Revenue (AR) as demand curve, Marginal Revenue (MR) steeper.
• Cost Curves:
  • Average Cost (AC): 'Smiley face' shape.
  • Marginal Cost (MC): Cuts AC at lowest point, 'Nike tick' shape.
• Profit Maximization Point: Where MC = MR, labeled as quantity Q1.
• Price Determination:
  • Price (P1) is read from AR curve.
• Profit Visualization:
  • Compare AR and AC at Q1 to find supernormal profit per unit.
  • Total Profit: Supernormal profit per unit multiplied by Q1 (area labeled as supernormal profit).

Efficiency Analysis

Allocative Efficiency

• Occurs where price = marginal cost.
• Monopolists charge P1, higher than MC, indicating allocative inefficiency.
• Consumer Impact:
  • High prices, low consumer surplus.
  • Restricted output, low choice.
  • Resources not aligned with consumer demand.

Productive Efficiency

• Monopolies do not operate at minimum point of AC curve, indicating productive inefficiency.
• Economies of Scale: Foregone voluntarily or due to diseconomies.
• X-Inefficiency: Assumed due to lack of competitive drive, allowing excess costs and waste.

Dynamic Efficiency

• Potential for dynamic efficiency exists:
  • Long-run supernormal profits could be reinvested.
  • Potential for innovation, R&D, new technology, capital upgrades.
• Benefits both consumers and the firm in the long term.

Conclusion

• Monopoly:
  • Generally statically inefficient.
  • Potential dynamic benefits.
• Further detailed analysis in subsequent videos.

Note: This is a foundational overview; future resources will provide more detailed pros and cons of monopolies.