9781118041581

PERFECT COMPETITION VERSUS PURE MONOPOLY

Recall from Chapter 7 that a perfectly competitive market delivers output to

consumers at the lowest sustainable price. (If prevailing prices were any lower,

firms would incur losses and leave the market.) In a pure monopoly, in contrast,

a single firm is the sole supplier of a good or service. The monopolist uses its

market power to restrict output and raise price.

The simplest way to compare and contrast the basic price and output impli-

cations for purely monopolistic and purely competitive industries is by means

of a graph. Figure 8.3 displays demand and cost curves for an unspecified good

or service. The industry demand curve D has the usual downward slope. For

any given industry price, it predicts total industry-wide sales. The horizontal

cost line S depicts the long-run unit cost of supplying different industry levels

of output. The cost line reflects the fact that output can be expanded in the

long run at a constant cost (at least for the range of output shown in the graph).

We can now use these demand and cost facts to predict long-run price and out-

put for a perfectly competitive industry versus the sameindustry organized as

a pure monopoly.

Under perfect competition, industry price and output are determined at

the intersection of the demand and supply curves. The total industry output is

split among a large number of firms, each producing at a constant cost per

unit. Competitive price and output are PCand QC, respectively. Note that PCis

identical to the typical supplier’s cost per unit; that is, the typical competitive

firm makes zero economic profit. If the market price ever rises above unit cost,

opportunities for positive economic profits will induce suppliers, including new

entrants, to increase output. This supply influx will drive price back down to the

unit cost level.^2

Now suppose the sameindustry is controlled by a single firm, a monopolist.

Because the monopolist is the industry, its demand curve is simply D. The

monopolist can supply as much or as little output as it wishes at a constant unit

cost given by S. What price and output will a profit-maximizing monopolist set?

As always, marginal analysis supplies the answer: The firm will set output where

326 Chapter 8 Monopoly

CHECK

STATION 2

What kinds of entry barriers helped protect Intel’s monopoly position? What actions did

Intel take to impede market entry?

(^2) We have spoken of the “typical” firm as though all competitive firms were identical. Of course, this
need not be literally true. Some firms may be more efficient producers and, therefore, have lower
costs than the average firm. For instance, suppose one firm owns an input (say, a piece of land) that
is twice as productive as the comparable inputs of other firms. Although we could view this as a cost
advantage, the likelihood is that the productivity edge already is reflected in the price of the input.
(Land that is twice as productive carries double the market price.) Thus, many seeming cost advan-
tages disappear. Any that remain can be incorporated easily into the supply curve. The supply
curve begins with the production of the lowest-cost producers and then slopes upward until a hor-
izontal segment of typical cost producers is reached.
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