Microeconomics Lecture Outline

Lecture 6: Monopoly

Number of firmsHomogeneous products Differentiated products
Only oneMonopoly
TwoDuopoly
A fewOligopoly
ManyPerfect CompetitionMonopolistic Competition

  1. Monopoly: Only 1 producer in market, price setter

  2. Causes for monopoly:
    • (Supply-side) Natural monopoly: economy of scale
    • (Demand-side) Network externality: bandwagon effect (Ref. Schelling)
    • (Policy) Government regulation

  3. Maximize: Profit = Revenues - Costs = P(y)y - C(y)

  4. Marginal revenues: MR=P(y)+P'(y)y, decreasing in output y (from positive to negative) (Fig. 6-1)
    • Example: Linear demand P(y)=a-by, MR=a-2by (Fig. 6-2a)

  5. Firm choice (MR=MC): P(y) + P'(y)y = C'(y) (Fig. 6-2b)

  6. Monopolist profit: SR v. LR
    • SR profit: always positive
    • LR profit: positive only if ATC(y) < Pm(y)

  7. Deadweight loss (DWL): surplus loss due to lowered output

  8. Monopoly taxation: output further reduced, price further up (Fig. 6-3)

  9. Price discrimination (PD)

    • 3rd-degree PD: across people (Fig. 6-4a)
      • Student discount: movie, gym
      • Library subscription rate
      • Coupons: supermarket, KFC
      • 1st/2nd class seats: airlines, train
      • Weekend rate: hotel, airlines

    • 2nd-degree PD: across units (Fig. 6-4b)
      • Bulk discount: 買一送一, 買五送一
      • Family Mart: 第二件六折

    • 1st-degree (perfect) PD: across people and units

    • Intertemporal PD:
      • Off-peak ("Moonlight") ticket discount: public utilities, water park, ski resort
      • 2nd-run movies
      • Hardcover v. paperback
      • Expensive new 3C product

    • 2-part tariff: access/entry fee + use fee (Fig. 6-4c)
      • Theme parks: Disneyland
      • Fitness clubs: membership + monthly fee
      • Public utilities, telephone

  10. Oligopoly/duopoly:

    • Nash equilibrium: price/quantity competition
    • Cartel/coalition: OPEC, anti-trust law
    • "Price difference refund": 買貴退錢