Monopoly — Hyunjoo Park

Definition

Single effective seller + no close substitutes + significant entry barriers.

Extreme case of Market Power (ability to sustain $P > MC$ ). Market power also exists with several firms.
One seller today ≠ monopoly if others can enter quickly (bottled-water example, slide 6).

Sources: patents/licences, economies of scale (Natural Monopoly), control of essential resources, strategic barriers, network effects/switching costs, mergers.

Pricing

Firm DC = market DC (downward): buyers buy less at a higher price. The firm picks a point on D, it can’t move D.
To sell one more unit it must cut the price on all units → $MR < P$ . Linear $P = a - bQ$ → $MR = a - 2bQ$ (twice as steep).
$MR = MC$ → $Q_M$ → read $P$ off D → $P > MC$ (markup = $P - MC$ ) → Profit Maximization
No supply curve: $Q$ depends on demand + MR + MC, not on price alone.

MR ≠ P

$MR = MC$ → q. Demand → p. $TR = p \times q$ , never $MR \times q$ . MR only appears in $MR = MC$ . Max profit = π at that q, not where $P = ATC$ (that’s break-even).

$P = 12 - Q$ , $MC = 4$	Monopoly	Efficient ( $P = MC$ )
$Q$	4	8
$P$	8	4
→ 4 mutually beneficial units not traded → DWL $= \frac{1}{2} \cdot 4 \cdot 4 = 8$

Profit

SR: profit, zero or loss; shutdown logic same as PC ( $P \ge AVC$ ) → Shutdown Rule
LR: barriers block entry → $\pi > 0$ can persist. Not guaranteed: tech change, new substitutes, regulation can erode it. Losses → exit.

Market power ≠ supernormal profit

$P > MC$ is about the last unit; profit is $(P - ATC) \cdot q$ .

Inefficiency → Allocative vs Productive Efficiency

Allocative ❌: $P > MC$ → $Q$ too low → DWL
Productive: not guaranteed: $Q$ comes from $MR = MC$ (demand), $\min ATC$ from costs only → match only by luck; plus X-inefficiency (weak competitive pressure → costs above minimum)
Transfer ≠ DWL (redistribution from consumers to firm); profit ≠ DWL
DWL triangle understates the cost: rent-seeking, X-inefficiency, entry deterrence. (Externalities are a separate failure, not a cost of monopoly.)

Price discrimination

Needs: market power + different willingness to pay + segmentation/self-selection + no resale (arbitrage).

Degree	How	Example
1st	each buyer pays their max willingness to pay (WTP)	personalised negotiated price
2nd	one menu for all, buyers self-select	basic/pro/enterprise, bulk discount
3rd	seller sorts groups	student discount, different country prices

1st degree: $MR = P$ → output = efficient level, no DWL, but the firm takes all consumer surplus.

Links: Natural Monopoly, Market Power, Perfect Competition, PC Decision Map