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Characteristics and Effects of Pure Monopoly

This chapter explores the characteristics of pure monopoly, including the profit-maximizing output and price. It also discusses the economic effects of monopoly and the concept of charging different prices in different markets. Examples of different types of monopolies are provided, along with a discussion on barriers to entry. The chapter concludes with a look at monopoly demand and the concept of price discrimination.

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Characteristics and Effects of Pure Monopoly

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  1. Chapter 10 Pure Monopoly

  2. Chapter Objectives • Characteristics of pure monopoly • Profit-maximizing output and price • Economic effects of monopoly • Charging different prices in different markets 10-2

  3. Characteristics of Monopoly • Single seller • No close substitutes • “Price maker” • Blocked entry • Nonprice competition 10-3

  4. Examples of Monopoly • Regulated or natural monopolies • electricity • Near monopolies • Western Union • Frisbee • De Beers • Geographic monopolies • Professional sport teams • Dual objectives of study 10-4

  5. 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 10-5

  6. Monopoly Demand • Assumptions: • Monopoly status is secure • No government regulation • Single-price monopolist • Face down-sloping demand • Entire market demand 10-6

  7. Price and Marginal Revenue $142 132 122 112 102 92 82 1 2 3 4 5 6 0 Marginal revenue is less than price • A monopolist is • selling 3 units at • $142 • To sell 4, price must • be lowered to $132 • All customers • must pay the same • price • TR increases $132 • minus $30 (3x$10) Loss = $30 D Gain = $132 10-7

  8. Price and Marginal Revenue $142 132 122 112 102 92 82 1 2 3 4 5 6 0 Marginal revenue is less than price • A monopolist is • selling 3 units at • $142 • To sell 4, price must • be lowered to $132 • All customers • must pay the same • price • TR increases $132 • minus $30 (3x$10) • $102 becomes a • point on the MR • curve • Try other prices to • determine other • MR points Loss = $30 D Gain = $132 MR The Constructed Marginal Revenue Curve Must Always Be Less Than the Price 10-8

  9. Down-Sloping Demand • Marginal revenue < price • To increase sales, must lower price • Firm is a price maker • Choose P,Q combination • Operate in the elastic region • Marginal revenue > 0 • Total-revenue test (recall) 10-9

  10. Profit Maximization • Output-price determination • Marginal revenue marginal cost rule • Same cost definitions • No supply curve 10-10

  11. Monopoly Revenue and Costs $200 150 Price 100 50 0 2 2 4 4 6 6 8 8 10 10 12 12 14 14 16 16 18 18 $750 500 Total Revenue 250 0 Demand and Marginal-Revenue Curves Elastic Inelastic D MR Total-Revenue Curve TR 10-11

  12. Profit Maximization $200 175 150 125 Price, Costs, and Revenue 100 75 50 25 1 2 3 4 5 6 7 8 9 10 Quantity MC Pm=$122 Economic Profit ATC D A=$94 MR=MC MR 0 10-12

  13. Misconceptions • Not the highest price • Total, not unit, profit • Possibility of losses 10-13

  14. Economic Effects Pure Monopoly Purely Competitive Market S=MC MC b Pm P=MC= Minimum ATC c Pc Pc a D D MR Qc Qm Qc Pure competition is efficient Monopoly is inefficient 10-14

  15. Economic Effects • Pure competition is efficient • Productive efficiency • Allocative efficiency • CS+PS maximized • Monopoly is inefficient • Charge P>MC • Deadweight loss • Income transfer 10-15

  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? 10-16

  17. Policy Options • Use antitrust laws • Divide the firm • Natural monopoly • Regulate price • Ignore • Unstable in long run 10-17

  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 10-18

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

  20. Regulated Monopoly • Natural monopolies • Rate regulation • Socially optimum price P = MC • Fair return price P = ATC 10-20

  21. Regulated Monopoly Price and Costs (Dollars) 0 Quantity Dilemma of Regulation Monopoly Price Pm Fair-Return Price Socially Optimal Price f Pf a ATC Pr r MC D MR b Qm Qf Qr 10-21

  22. De Beers Diamonds • 66 years of monopoly pricing • Independent producers went along • Mid-2000 abandoned monopoly • New discoveries • Independent producers withdrew • Political considerations • New strategy • “The diamond supplier of choice” 10-22

  23. Key Terms • pure monopoly • barriers to entry • simultaneous consumption • network effects • X-inefficiency • rent-seeking behavior • price discrimination • socially optimal price • fair-return price 10-23

  24. Next Chapter Preview… Monopolistic Competition and Oligopoly 10-24

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