October 30, 2016

Intro

  • Monopoly is the market, where single company is the only supplies of a particular good.
  • Are monopolies bad?
  • Let's look at example. Why glasses are so expensive?

Example

  • There is a Italian company called Luxottica.
  • They own around 80% (unofficial figure) of eyewear market with brands including Ray-Ban, Oakley, Persol, etc.
  • On top of that they own several major optical chains such as Lenscrafters, Target Optical, etc.
  • This may create some barriers to enter the market.

Marginal Revenue

P Q TR MR
300 0 0
250 1 250
200 2 400
150 3 450
100 4 400
50 5 250

Profit maximization

P Q TR MR TC MC Profit
300 0 0 250 100
250 1 250 150 115
200 2 400 50 150
150 3 450 -50 195
100 4 400 -150 245
50 5 250 300

Elasticity

  • By definition, demand at which \(MR>0\) is elastic;
  • If \(MR<0\), demand is inelastic;
  • If \(MR=0\), demand is said to be unit elastic;
  • Monopoly will never produce in inelastic region!

Wrap up

  • We considered the market of single-price monopoly where only one firm produces a good;
  • Compared to perfect competition, monopolist has market power;
  • Barriers usually protect company from potential competitors;