W3.1 Monopoly

Key points

• Monopoly = single seller + no close substitutes + entry barriers; extreme case of market power ($P > MC$)
• Firm DC = market DC → price cut hits all units → $MR < P$; $MR = MC$ → $Q$, $P$ from demand → $P > MC$; no supply curve
• Allocatively inefficient (DWL; transfer ≠ DWL); productive efficiency not guaranteed; rent-seeking and X-inefficiency add costs
• Barriers let $\pi > 0$ persist in the LR, until tech change or substitutes erode it
• Price discrimination (1st/2nd/3rd) needs market power, different WTP, segmentation, no arbitrage
• Natural monopoly = cost subadditivity (large F, MES vs demand); $P = MC$ → loss → subsidy, $P = AC$ regulation or public ownership

Concepts

• Monopoly
• Natural Monopoly
• Market Power
• Profit Maximization
• Allocative vs Productive Efficiency
• Shutdown Rule