Monopoly supply.

Monopoly Supply

I. Introduction

Conventional economic theory takes the position that the supply curve construct is only applicable to the purely competitive firm, being neither meaningful nor relevant in a monopoly context. A sampling of representative statements over the

last two decades supporting this conclusion are: [Lloyd 1967,p.168] "for a monopolistic firm, the supply curve is not easy to come by " [Nicholson 1985,p. 423] "However, to connect the resulting series of equilibrium points on the market demand curves would have little meaning. This locus might have a very strange shape depending on how the market demand curve's elasticity (and hence its associated MR curve) changes as the curve is shifted. In this sense the monopoly firm has no well defined supply curve" and [Lancaster 1974 pp. 192-3] "It is meaningless to ask what output the monopolist will supply at each of several prices ... A market with a monopoly supplier has no supply curve of the ordinary kind." Some authors mention a point supply curve for the monopoly case.

Gould and Ferguson [1980, p. 261] correctly note "If demand shifts while cost conditions remain stationary, a monopoly supply curve can be constructed. But the curve depends upon the precise set of demand shifts." However, they also state [p. 261], "in neither case does the monopoly supply curve have the clear and exact meaning that competitive supply has and the concept of supply price is entirely meaningless in monopoly."

The apparent lack of generality of the supply curve notion will be shown to result from an inappropriately narrow definition of the supply curve. That is, the supply curve has been defined as the locus of quantities a firm will be willing to supply at various prices, holding constant the conditions of supply. A broader definition, subsuming this as a special case, is to define a firm's supply curve, ceteris paribus, as the locus of profit maximizing supply price-quantity equilibrium positions.

Supply generally depends on demand parameters, except in the case of perfect competition. If single parameter shifts are observed (e.g., parallel shifts outward due to rising income), then the expected supply response can be estimated. This latter approach allows the supply response to depend on more general demand parameters, since in all market structures other than perfect competition firms are not, in fact, price takers.