Introduction to Monopoly

In this module we explore markets with a single seller, known as a monopoly market.

Key Questions Addressed

• What are the profit-maximizing quantity and price for a monopolist?

• How does this profit-maximizing price compare to a perfectly competitive price?

• What is the social cost of a monopoly?

Examples of Monopoly Firms

• AbbVie: A pharmaceutical company that patented the drug Humira in 2002.

  • A patent is an exclusive right of production of a good or service.

  • AbbVie was the sole producer of Humira from 2003 to 2021.

  • Humira is an injectable drug used to treat rheumatoid arthritis.

  • During its patent period, AbbVie earned over $200 billion in revenue from Humira.

• Microsoft: The sole seller of the Windows operating system.

• Wolfram: The sole seller of the Mathematica software.

• SpaceX: Considered a de facto monopoly for satellite launches into Earth's orbit.

Causes of Monopolies

• Government Regulation: Patents and copyrights grant exclusive rights, and governments may create monopolies in sectors of national importance (e.g., defense, railways).

• Control of Scarce Resources: Companies may control essential resources, like the De Beers Diamond Consortium.

• Cost Structure: When average total cost decreases as output increases, it can lead to a natural monopoly (e.g., cellular service companies, private utility companies).

Profit-Maximizing Quantity and Price of a Monopolist

• The demand curve faced by a monopolist is the market demand curve.

• A monopolist must lower the price to sell more quantity and vice versa.

• In contrast to perfectly competitive markets where firms are price takers, monopolists choose the price.

• Profit is total revenue minus total cost.

• The profit-maximizing quantity can be determined using the Marginal Principle: Produce the largest quantity such that marginal revenue is greater than or equal to marginal cost, provided that profits are not negative.

• Total revenue is price times quantity, and total cost is average total cost times quantity.

• The monopolist's profit is the difference between total revenue and total cost.