Long-Run Monopoly Equilibrium

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Monopoly equilibrium is fundamentally different from that in competitive markets, especially in the long run. While firms in perfectly competitive markets cannot sustain supernormal profits due to free entry and exit, monopolists often maintain their position over time thanks to significant entry barriers. Understanding long-run monopoly equilibrium is critical for assessing persistent market power, consumer welfare implications, and the role of public policy in curbing monopolistic excess. This article examines how monopolies sustain equilibrium in the long run, explores the underlying cost and revenue dynamics, and discusses real-world implications for efficiency and regulation.

What Is Long-Run Equilibrium?

In economics, the long run is defined as the period in which all factors of production are variable and firms can adjust fully to changes in the market. For monopolies, long-run equilibrium refers to the output and price combination where:

  • Marginal revenue (MR) equals marginal cost (MC)
  • The monopolist maximizes profit and has no incentive to expand or contract output
  • Barriers to entry prevent competition, allowing sustained supernormal profits

Key Features of Long-Run Monopoly Equilibrium

1. Profit Maximization

As in the short run, monopolists produce where MR = MC. However, in the long run, they may adjust plant size or scale of production to minimize costs.

2. Supernormal Profits

Unlike perfectly competitive firms, monopolists can continue earning profits above normal levels due to high entry barriers such as:

  • Legal protection (patents, copyrights)
  • Control over essential resources
  • Economies of scale (natural monopoly)
  • Brand loyalty and sunk costs

3. No Entry of New Firms

Without competitive pressure, monopolists retain their market position. There is no adjustment process where supernormal profits attract new entrants, as in competitive markets.

4. Productive Inefficiency

Monopolists may not produce at the minimum point of their long-run average cost (LRAC), unlike competitive firms that operate at full efficiency in the long run.

Graphical Representation

The graph of long-run monopoly equilibrium includes:

  • Downward-sloping demand (D)
  • Marginal revenue (MR) curve below demand
  • U-shaped long-run average cost (LRAC) curve
  • Marginal cost (MC) curve intersecting both MR and LRAC
Price
|               LRAC
|               /‾‾‾‾\
|              /     \
|             /       \     
|            /         \     D
|           /           \___/‾‾‾‾‾
|          /                     \
|--------/------------------------\------------ Quantity
|         MR                      \
|                                  MC

Equilibrium:

  • Output is Qm, where MR = MC
  • Price is Pm, found from demand at Qm
  • Average cost is below price → Profit = (Pm – LRAC) × Qm

Mathematical Overview

Assume demand is linear:

P = a - bQ

Total revenue: TR = P × Q = aQ – bQ²
Marginal revenue: MR = d(TR)/dQ = a – 2bQ
Assume long-run marginal cost is constant at MC = c
Set MR = MC:

a - 2bQ = c  
Q* = (a - c)/2b  
P* = a - bQ* = (a + c)/2  
Profit = (P* - LRAC) × Q* (if LRAC is known)

Efficiency Implications

1. Allocative Inefficiency

The monopolist charges a price above marginal cost, meaning that the value to consumers exceeds the cost of production for additional units not produced.

2. Productive Inefficiency

In the long run, monopolists may operate to the left of the minimum LRAC, producing at less than optimal scale.

3. Deadweight Loss

A portion of societal surplus is lost due to underproduction. This triangle between the demand curve and the MC curve represents missed beneficial exchanges.

Comparison with Perfect Competition

Feature Monopoly Perfect Competition
Price and Output P > MC, Lower Output P = MC, Higher Output
Profit in Long Run Supernormal Profit Zero Economic Profit
Efficiency Allocatively and Productively Inefficient Efficient in Long Run

Sources of Long-Run Monopoly Power

1. Legal Barriers:

  • Patents, copyrights, and licenses prevent entry

2. Economies of Scale:

  • Natural monopolies (e.g., utilities) can supply the market more efficiently than multiple firms

3. Network Effects:

  • Digital platforms become more valuable as more users join (e.g., Google, Facebook)

4. Control of Inputs:

  • Exclusive access to essential resources can lock out competitors

Regulatory Approaches

1. Price Regulation

Authorities may set prices based on average cost or marginal cost to simulate competitive outcomes.

2. Antitrust Laws

Governments may prohibit monopolistic practices or break up firms that abuse dominance.

3. Public Ownership

Essential services such as water, postal services, or railways may be operated by the state to ensure fair access.

4. Franchise Bidding

In natural monopolies, private firms bid for the exclusive right to serve the market under regulated terms.

Real-World Examples

1. Utilities

Power grids, water systems, and rail networks often exhibit long-run monopoly characteristics and are heavily regulated to prevent abuse.

2. Pharmaceutical Patents

Patent-protected drugs allow pharmaceutical firms to charge high prices over the long run while recovering R&D costs.

3. Big Tech Platforms

Firms like Apple and Google maintain long-term dominance through ecosystem control, user data, and network effects.

When Profit Becomes Policy

Monopolies do not simply exist in a vacuum of supply and demand curves. In the long run, they become institutions—shaping economic access, innovation, and even social behavior. While their persistence may fund innovation or infrastructure, unchecked monopoly power distorts resource allocation, inflates prices, and reduces societal welfare.

Policymakers must weigh the benefits of scale and stability against the costs of exclusion and inefficiency. Regulation, transparency, and competition-friendly policies are essential to ensure that long-run monopoly equilibrium serves not only the firm, but also the public.

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