Natural monopoly

If an industry has declining average costs over the entire schedule, it is most optimal for a single firm to produce the entire output.

Example:

• Utilities industry - the costs of establishing a means to produce power and supply it to each household can be very large and society can benefit from having natural monopolies because having multiple firms operating in such an industry is economically inefficient.

Price discrimination

Definition
Seller charge different prices to different consumers for the same product. Increases total output and improves allocative efficiency.

Price discrimination requirements

• A downward sloping demand curve, with two or more groups of customers with different price elasticity.
• Ability to prevent arbitrage between customer groups, i.e. cannot resell among them.

Advantages:

• Increase output and revenue
• Reduce allocative inefficiency

Profit maximization

It follows the general rule for profit maximization, MR = MC.

No profit if ATC above demand curve and with profit if will make a profit only if ATC curve lies below demand curve.

As the monopolist does not know exactly how much consumers are willing to buy at particular prices, it must "search" for the optimum price.

Profit per unit = (Price from demand curve - Price from ATC curve) at the level of output whereby MR = MC.

Characteristics of Monopoly

Characteristics of Monopoly

• No good substitute
• Single firm
• high barriers to entry Not to charge highest possible price but to maximize profit
• Price Searchers with high entry barriers
• Have some price setting power and face a downward sloping demand curve.

Disadvantages of Monopoly:

• Consumer’s limited option
• Allocative inefficiency (output level below P=MC);
• Entry & exit not motivated by profit
• Legal protection allow seeking abnormal economic profit,
• Seeking favour from Government ( rent-seeking) => waste of resources.

Forms of entry barriers

• Patents
• Control over a resource
• Economies of scale
• Government license/legal barrier
• Resources control