ECON1101 - Monopolies

Monopolies and Profit

Monopolist will only earn a profit if the profit-maximising price (the intersection of Marginal Revenue and Marginal Cost) is greater than the Average Total Cost.

When monopolistic competition comes into play (where there are few barriers to entry and hence lots of firms come into the market) it can become very hard for monopolists to set the price at a level where they can earn a profit.

Regulating Natural Monopolies

The problem with wanting to take advantage of economies of scale whilst encouraging efficient output is that it's difficult to force the Price to equal the Marginal Cost. And even if we do set that there's still a loss for the monopolist.

We have a few options:

  • Price = Average Total Cost
  • Price = Marginal Cost and then subsidise the monopolist
  • Two Part Tariff (Base price + per unit price)
  • Price Caps on the market.

Monopolistic Competition

monopoly = 1 product, 1 firm, lots of barriers to entry
monopolistic = many different products, many firms, no barriers to entry or exit

Long Run Monopolistically Competitive Equilibrium:

  • Price > Marginal Cost
  • Unexploited Economies of Scale
  • However cost of increasing efficiency is a decrease in variety.