Monopoly & Market Power
MR lies below demand and is twice as steep. Find Q where MR = MC, then go up to demand for the price. Never read price off MR.
Why MR falls below price
A monopolist faces the whole market demand curve, so selling one more unit means cutting the price on every unit, not just the new one.
Edwards flagged this unit as exam-likely, and it was: Taylor Swift on the midterm, a multiple choice on the final.
Welfare accounting, lettered as in lecture
| Consumer surplus | Producer surplus | Lost | |
|---|---|---|---|
| Competition | a+b+c+d+e | f+g+h | — |
| Monopoly | a+b | c+d+f+g | e+h = deadweight loss |
c+d is the distributional story: consumer surplus under competition, producer surplus under monopoly.
Three things students get wrong
- A monopolist has no supply curve. For a given demand curve there is one quantity it wants to supply; it traces no price–quantity relationship.
- It does not produce where MC = P, so not where MB = MC. That gap is the inefficiency.
- Monopoly does not guarantee profit — that depends on ATC at Qm. But unlike a competitive firm it can hold positive profit forever: barriers to entry are what make it a monopoly.
Where market power comes from
- Barriers to entry
- High fixed costs (railways), patents and legal protections (pharmaceuticals), licensing and gatekeeping.
- Natural monopoly
- One firm serves the whole market at lower average cost than several — PG&E and other utilities, railways, and near-zero-marginal-cost goods such as software and digital media.
- Network effects
- Value rises with the user base: Facebook, rideshare platforms.
The patent tradeoff
Innovation is costly and easy to copy: drug development has huge fixed costs and low marginal costs, so without protection competitors reverse-engineer the product and the innovator never recoups. Patents buy innovation with a time-limited monopoly. The evidence is mixed — hard to show more generous patents produce more innovation, easy to show firms patent more strategically when protection expands, plus evidence patents hinder follow-on innovation. Much long-run growth may come from the public domain.
Antitrust, then and now
| Gilded Age | Railroads, shipping and oil consolidate into monopolies |
| 1911 | Standard Oil broken up; early-1900s antitrust dismantles trusts, utilities regulated |
| Late 1970s→ | Deregulation; concentration returns in cable, broadband, tech. The consumer welfare standard takes over: low prices and no visible consumer harm mean concentration alone is no problem |
| 2024 | Google judged an illegal monopoly in search; suit alleging Visa stifled debit-card competition |
That standard let Amazon, Google and Facebook grow by pricing low and buying potential competitors — Instagram, WhatsApp. The EU and Lina Khan's FTC pushed back.
- Reading the monopoly price off the MR curve. Common and costly.
- Drawing MR with the same slope as demand. Twice as steep.
- Assuming monopolists always profit. It depends on ATC.
- Saying the monopolist "restricts supply." It picks a point on demand; it has no supply curve.
- Taking total cost as the rectangle under a rising MC. It is the triangle underneath.
A monopolist faces demand P = 100 − 2Q. Its marginal revenue curve is:
- AMR = 100 − 2Q
- BMR = 100 − 4Q
- CMR = 50 − 2Q
- DMR = 200 − 2Q
Answer
B — MR = 100 − 4Q.
TR = 100Q − 2Q², so MR = 100 − 4Q: same intercept, twice the slope.
C is the trap: halving the intercept instead of doubling the slope. MR and demand start at the same point on the price axis; MR just falls twice as fast.
A monopolist finds MR = MC at Q = 20. At Q = 20, MR = $15, the demand curve is at $40, and ATC = $25. The price it charges and its profit are:
- A$15 and −$200
- B$40 and $300
- C$25 and $0
- D$40 and $800
Answer
B — price $40, profit $300.
Quantity from MR = MC, then go up to demand: P = $40. Profit = (P − ATC) × Q = ($40 − $25) × 20 = $300.
A is the trap: reading the price off the MR curve. MR is what the firm earns on the last unit; the price is what buyers are willing to pay, which lives on demand.
The Eras Tour sold 10 million tickets and grossed $2 billion. Fixed costs are zero and marginal cost rises linearly from $0 to $100 at 10 million tickets. Profit is:
- A$1.5 billion
- B$1 billion
- C$2 billion
- DZero
Answer
A — $1.5 billion.
With zero fixed costs, total cost is the area under the MC curve — a right triangle: TC = ½ × 10m × $100 = $500 million. Revenue is $200 × 10m = $2 billion, so profit = $2bn − $0.5bn = $1.5 billion. Edwards notes on the answer key that he got this wrong at first.
B is the trap: treating total cost as the rectangle $100 × 10m = $1bn. MC is a rising line, so the area under it is a triangle, not a box.
The consumer welfare standard, dominant in US antitrust since the late 1970s, holds that:
- AAny firm with a large market share should be broken up
- BIf prices stay low and consumers are not demonstrably harmed, concentration alone is not a problem
- CMergers are legal only if they lower average total cost
- DConsumer surplus must be maximized in every market
Answer
B — low prices, no visible harm, no case.
That standard let Amazon, Google and Facebook grow by pricing low and acquiring potential competitors, Instagram and WhatsApp being the standard examples. The EU and the US under Lina Khan's FTC pushed back, producing the 2024 Google search judgment and the 2024 Visa suit.
A is the trap: it describes the structural approach of early-1900s antitrust that broke up Standard Oil in 1911 — the opposite of the standard that replaced it.
The Eras Tour sold 10 million tickets and grossed $2 billion. (a) Does Taylor Swift have market power? (b) Draw the market. (c) Was the efficient number of tickets sold?
Model answer
Average price = $2bn / 10m = $200.
(a) She has market power, emphatically. With perfect product differentiation there is exactly one producer of a Taylor Swift concert. Some fans may see other artists as substitutes, but nobody else can supply the good itself.
(b) Downward-sloping demand, MR below it and twice as steep, upward-sloping MC. Qm = 10m where MR = MC; P = $200 read up on demand.
(c) Not efficient. Where demand meets MC — the competitive benchmark — about 15 million tickets would trade. Monopoly pricing cut that by a third. On those 5 million missing tickets, willingness to pay exceeded marginal cost. A lot of unfulfilled Swifties.
- Computing the $200 average price from revenue ÷ quantity.
- Justifying market power by product differentiation — one producer of this good — not by "she's famous".
- MR drawn twice as steep, and the price read off demand.
- Naming the competitive benchmark where demand meets MC and the ~15m figure.
- Stating why the missing units matter: WTP > MC on all of them.
If monopoly causes deadweight loss, why does the US grant pharmaceutical patents? Give the case and the honest caveats.
Model answer
Inventing is expensive and copying is cheap. Drug development carries huge fixed costs and low marginal costs, so a competitor who reverse-engineers the molecule can undercut the innovator, who then never recovers R&D. A time-limited patent monopoly lets future profits fund the invention.
The caveats: it is empirically hard to show that more generous patents produce more innovation; it is easy to show firms patent more strategically when protection widens; there is evidence patents impede follow-on innovation; and much long-run growth may come from public-domain ideas and publicly funded research.
- Framing it as a tradeoff: deadweight loss now for innovation later.
- The cost structure named specifically — high fixed, low marginal.
- The appropriability problem: copying destroys the return on R&D.
- At least two of the empirical caveats, including follow-on innovation.