英文版微观经济学复习提纲Chapter 9. Monopoly markets

9

Monopoly Markets

Chapter Summary

A monopoly is a firm that is the only seller of a good or service that does not have a close substitute. For a monopoly to exist, barriers to entering the market must be so high no other firms can enter. These entry barriers result from: (1) government blocking the entry of more than one firm into a market, (2) control over an input necessary to produce a product, (3) important network externalities, and (4) economies of scale so large that one firm has a natural monopoly.

A monopoly firm maximises profit by producing the quantity of output that makes marginal revenue equal to marginal cost. A monopoly firm’s demand curve is the same as the market demand curve for the product it sells. If the monopolist’s price exceeds its average total cost at the output where marginal revenue equals marginal cost, it will earn an economic profit. Because of high entry barriers, new firms will not be able to enter the market, so if other things remain the same the firm will be able to continue to earn economic profits, even in the long run. Generally, a monopoly firm will produce less and charge a higher price than would a perfectly competitive industry producing the same good. The monopolist’s profit-maximising price exceeds marginal cost.

In Australia, the competitive behaviour of firms is monitored by the Australian Competition and Consumer Commission (ACCC), which was set up in 1995. The ACCC’s role is to examine business conduct with respect to its benefit to consumers, businesses and community, and to examine mergers or acquisitions with respect to its potential impact on efficiency and competition. It is also typical for state regulatory commissions to set prices for natural monopolies. Most regulators allow owners of monopoly firms to earn a normal rate of return on their investment.

Learning Objectives

When you finish this chapter you should be able to:

1.Define monopoly. The economic model of monopoly provides a benchmark for a firm that faces no

competition from other firms supplying its product. The model is also useful for analysing situations where firms agree to not compete and act as if they were a monopoly. A single seller in a small, local market may find they have considerable monopoly power, too.

2.Explain the four main reasons monopolies arise. For monopoly to exist, barriers to entering the

market must be so high that no other firm can enter. Government may block the entry of firms by granting a patent or copyright to an individual or firm and by granting a public franchise which makes one firm the exclusive provider of a good or service. Other barriers include control of a key input, network externalities, and large economies of scale.

3.Explain how a monopoly chooses price and output. A monopoly maximises profit or minimises its

losses by producing the quantity of output that makes marginal revenue equal marginal cost. Even if the monopolist earns economic profits, new firms will not be able to enter the market. Therefore, the monopolist can continue to earn economic profits, even in the long run.