Chapter 7: Monopoly

Start Up: Surrounded by Monopolies

If your college or university is like most, you spend a lot of time, and money, dealing with firms that face very little competition. Your campus bookstore is likely to be the only local firm selling the texts that professors require you to read. Your school may have granted an exclusive franchise to a single firm for food service and to another firm for vending machines. A single firm may provide your utilities—electricity, natural gas, and water.

Unlike the individual firms we have previously studied that operate in a competitive market, taking the price, which is determined by demand and supply, as given, in this chapter we investigate the behavior of firms that have their markets all to themselves. As the only suppliers of particular goods or services, they face the downward-sloping market demand curve alone.

We will find that firms that have their markets all to themselves behave in a manner that is in many respects quite different from the behavior of firms in perfect competition. Such firms continue to use the marginal decision rule in maximizing profits, but their freedom to select from the price and quantity combinations given by the market demand curve affects the way in which they apply this rule.

We will show that a monopoly firm is likely to produce less and charge more for what it produces than firms in a competitive industry. As a result, a monopoly solution is likely to be inefficient from society’s perspective. We will explore the policy alternatives available to government agencies in dealing with monopoly firms. First, though, we will look at characteristics of monopoly and at conditions that give rise to monopolies in the first place.