Chapter 10

Monopoly: Decision-Making Without Rivals

In This Chapter

arrow Identifying the source of monopoly power

arrow Separating demand and marginal revenue

arrow Determining the profit-maximizing quantity and price

arrow Minimizing cost with multiple factories

Parker Brothers’ popular board game Monopoly has it all wrong. The board game doesn’t describe monopoly at all. The board game has 22 properties — not counting railroads and utility companies — that you can buy, sell, and rent. That’s way too much competition. In the market structure of monopoly, there’s only one firm, and because a single firm produces the good, monopoly has a very low degree of competition. In fact, monopolists have no direct rivals.

This situation may give the misimpression that a monopolist has unlimited power. That isn’t the case. The monopolist is constrained by whether or not consumers are willing to buy the monopolist’s product at a given price. Also, a monopolist can face indirect competition from other firms that produce something that addresses the same needs. For example, the firm providing natural gas and the firm ...

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