Pure Monopoly

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All

Characteristics of Monopoly
Single seller
No close substitutes
“Price maker”
Blocked entry
Nonprice competition

10-2
Examples of Monopoly
Regulatedor natural
monopolies
 electricity
Near monopolies
 Western Union
Geographic monopolies
 Professional sport teams
Dual objectives of study

10-3
Barriers to Entry
Economies of scale
Legal barriers to entry
 Patents
 Licenses

Ownership or control of
essential resources
Pricing and other strategic
barriers to entry 10-4
Monopoly Demand
Assumptions:
 Monopoly status is secure
 No government regulation
 Single-price monopolist

Face down-sloping demand

 Entire market demand

10-5
 Price and Marginal Revenue
Marginal revenue is less than price
$142
132
• A monopolist is
selling 3 units at 122
$142 112 Loss = $30 D
• To sell 4, price must 102
be lowered to $132 Gain = $132
92
• All customers
must pay the same 82
price
• TR increases $132
minus $30 (3x$10)
0 1 2 3 4 5 6

10-6
 Price and Marginal Revenue
Marginal revenue is less than price
• A monopolist is
selling 3 units at
$142 $142
• To sell 4, price must 132
be lowered to $132
122
• All customers
Loss = $30 D
must pay the same 112
price 102
• TR increases $132 92
Gain = $132
minus $30 (3x$10)
82
• $102 becomes a
point on the MR
MR
curve
• Try other prices to
determine other 0 1 2 3 4 5 6
MR points
The Constructed Marginal Revenue Curve
Must Always Be Less Than the Price
10-7
Down-Sloping Demand
Marginal revenue < price
 Toincrease sales, must lower
price
Firm is a price maker
 Choose P,Q combination
Operate in the elastic region
 Marginal revenue > 0
Profit Maximization
Output-price determination
 Marginal revenue marginal cost
rule
 Same cost definitions

No supply curve

10-9
Monopoly Revenue and
Costs
Revenue Data Cost Data
(2) (3)
(1) Price Total (4) (5) (6) (7) (8)
Quantity (Average Revenue Marginal Average Total Cost Marginal Profit (+)
Of Output Revenue) (1) X (2) Revenue Total Cost (1) X (5) Cost or Loss (-)

0 $172 $0 ] $100 ] $90 $-100

$162
1 162 162 ] $190.00 190 ] 80 -28
142
2 152 304 ] 135.00 270 ] 70 +34
122
3 142 426 ] 113.33 340 ] 60 +86
102
4 132 528 ] 100.00 400 ] 70 +128
82
5 122 610 ] 94.00 470 ] 80 +140
62
6 112 672 ] 91.67 550 ] 90 +122
42
7 102 714 ] 91.43 640 ] 110 +74
22
8 92 736 ] 93.75 750 ] 130 -14
2
9 82 738 ] 97.78 880 ] 150 -142
-18
10 72 720 103.00 1030 -310

Can you See Profit Maximization?

10-10
Monopoly Revenue and
Costs
Demand and Marginal-Revenue Curves
$200
Elastic Inelastic

150
Price
100

50
D
MR
0 2 4 6 8 10 12 14 16 18
Total-Revenue Curve
$750
Total Revenue

500

250
TR

0 2 4 6 8 10 12 14 16 18
10-11
Profit Maximization
$200

Price, Costs, and Revenue 175

MC
150
Pm=$122
125
Economic
Profit ATC
100

75
A=$94 D
50
MR=MC

25
MR

0 1 2 3 4 5 6 7 8 9 10
Quantity
10-12
Misconceptions
Not the highest price
Total, not unit, profit
Possibility of losses

10-13
Loss Minimization
Price, Costs, and Revenue
MC

ATC
A Loss
Pm
AVC

V
D

MR=MC

MR

0 Qm
Quantity
10-14
Economic Effects

Purely Pure
Competitive Monopoly
Market

S=MC MC
Pm b
P=MC=
Pc Minimum Pc c
ATC
a

D D
MR
Qc Qm Qc

Pure competition is efficient

Monopoly is inefficient
10-15
 Economic Effects

Pure competition is
efficient
 Productive efficiency
 Allocative efficiency
 CS+PS maximized
Monopoly is inefficient
 ChargeP>MC
 Deadweight loss
Income transfer 10-16
Cost Complications
Economies of scale
 Simultaneous consumption
 Network effects
X-inefficiency
 Lowest ATC not achieved
Rent seeking behavior
Technological advance
 More likely with monopoly?
10-17
Policy Options
Use antitrust laws
 Divide the firm
Natural monopoly
 Regulate price
Ignore
 Unstable in long run

10-18
Price Discrimination
 Three forms
 Charge each customer max
willingness to pay
 Charge one price for first
unit and a lower price for
subsequent units
 Charge different customers
different prices

10-19
 Price Discrimination
 Conditions
 Monopoly power
 Market segregation
 No resale
 Examples
 Airfares
 Electric utilities
 Theaters & golf courses

10-20
Regulated Monopoly
Natural monopolies
Rate regulation
Socially optimum price
P = MC
Fair return price
P = ATC
10-21
 Regulated Monopoly
Dilemma of Regulation
Monopoly
Price
Price and Costs (Dollars)

Pm
Fair-Return
Price
Socially
f Optimal
Pf a Price
ATC

Pr
r MC

MR D
b
0 Qm Qf Qr
Quantity

10-22