Abstract
In this chapter, we discuss the market structures of monopoly and monopolistic competition. Unlike perfect competition which has many sellers, a monopoly market has just one seller. In this sense, it is the polar opposite of perfect competition.
This is a review chapter. You can learn more detail about the basic models that are found in this chapter from any introductory or intermediate microeconomics textbook, such as Frank and Bernanke (2008), Mankiw (2011), Bernheim and Whinston (2008), Pindyck and Rubenfield (2009), and Varian (2010). For more advanced treatments, see Nicholson and Snyder (2012) and Mas-Colell et al. (1995).
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Notes
- 1.
In Chap. 2, we saw that p > MR for a downward-sloping demand curve. For a linear demand function, we found that MR and demand have the same y-intercept but that MR is twice as steep as the demand function.
- 2.
As in the previous chapter, although q is the only variable in this example, we use ∂ instead of d to remind us that there are many other variables that are implicitly assumed to be held fixed.
- 3.
This produces a maximum because the profit function for each firm is concave. That is, the second-order condition of profit maximization holds, because the second derivative of the profit function is −2b < 0.
- 4.
Of course, demand and cost conditions could be such that long-run profits are zero. This is precisely the long-run equilibrium in the monopolistically competitive model that we discuss subsequently. In the short run, a monopolist can lose money and stay in business as long as its optimal price is above its short-run variable cost, just as with a competitive firm.
- 5.
This is an application of the product rule, as discussed in the Mathematics and Econometrics Appendix at the end of the book. That is, if y = wz where w = f(x) and z = g(x), then dy/dx = w(dz/dx) + z(dw/dx). The derivative of the product of two functions equals the first function times the derivative of the second function plus the second function times the derivative of the first function. Because TR = p(q) · q, MR = p + (∂p/∂q)q.
- 6.
It is also possible for a monopolist to have unexerted monopoly power, where the firm has the ability to raise price but chooses not to for public relations reasons or to avoid an antitrust challenge, for example.
- 7.
- 8.
Rent-seeking expenditures themselves may be viewed as simple transfers from monopolies to politicians. Nevertheless, not all is transferred and rent seeking that effectively increases market power raises the deadweight loss associated with monopoly.
- 9.
In the next chapter, we discuss the different types of product differentiation. At this point, all that matters is that products are different in the eyes of consumers.
- 10.
Because we are not talking about a true monopoly firm, it may be better to call this market power than monopoly power. Carlton and Perloff (2005, 93) suggest that we define monopoly power as the case where p * > MC and firm long-run profits are positive and define market power as the case when p * > MC and long-run profits are zero. However, these terms are generally used interchangeably.
- 11.
We exaggerate the steepness of demand (and the markup of price over marginal cost) to make it easier to see the tangency point in the figure.
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Tremblay, V.J., Tremblay, C.H. (2012). Monopoly and Monopolistic Competition. In: New Perspectives on Industrial Organization. Springer Texts in Business and Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-3241-8_6
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