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Pure Monopoly

Chapter 10. Pure Monopoly. Chapter Objectives. Characteristics of pure monopoly Profit-maximizing output and price Economic effects of monopoly Charging different prices in different markets. 10- 2. Characteristics of Monopoly. Single seller No close substitutes “Price maker”

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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. Long-Run ATC Shapes Economies Of Scale Diseconomies Of Scale Average Total Costs Long-Run ATC Output Long-run ATC curve where costs are lowest only when large numbers are participating 8-5

  6. Barriers to Entry • Economies of scale • Legal barriers to entry • Patents (Pharmaceuticals) • Licenses (LCB, taxis) • Ownership or control of essential resources (NFL) • Pricing and other strategic barriers to entry (Netscape vs IE) 10-6

  7. Monopoly Demand • Assumptions: • Monopoly status is secure • No government regulation • Single-price monopolist • Face down-sloping demand • Entire market demand 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) Loss = $30 D Gain = $132 10-8

  9. 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 10-9

  10. 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) 10-10

  11. Profit Maximization • Output-price determination • Marginal revenue = marginal cost rule • Same cost definitions • No supply curve 10-11

  12. Monopoly Revenue and Costs – pg. 205 ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Cost Data Revenue Data (2) Price (Average Revenue) (3) Total Revenue (1) X (2) (1) Quantity Of Output (4) Marginal Revenue (5) Average Total Cost (6) Total Cost (1) X (5) (7) Marginal Cost (8) Profit (+) or Loss (-) 0 1 2 3 4 5 6 7 8 9 10 $172 162 152 142 132 122 112 102 92 82 72 $0 162 304 426 528 610 672 714 736 738 720 $100 190 270 340 400 470 550 640 750 880 1030 $-100 -28 +34 +86 +128 +140 +122 +74 -14 -142 -310 $90 80 70 60 70 80 90 110 130 150 $162 142 122 102 82 62 42 22 2 -18 $190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.75 97.78 103.00 Can you See Profit Maximization? 10-12

  13. 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 10-13

  14. 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 10-14

  15. Determining P and Q for a Monopolist

  16. Misconceptions • Not the highest price • Total, not unit, profit • Possibility of losses 10-16

  17. Loss Minimization Price, Costs, and Revenue Quantity MC ATC A Loss Pm AVC V D MR=MC MR 0 Qm 10-17

  18. 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 10-18

  19. Economic Effects • Pure competition is efficient • Productive efficiency • Allocative efficiency • CS+PS maximized • Monopoly is inefficient • Charge P>MC • Deadweight loss • Income transfer - inequality 10-19

  20. Inefficiency in Monopoly

  21. Cost Complications • Economies of scale • Simultaneous consumption – low MC • iPhone vs. Snapchat • Other example? • Network effects – popularity/ease • Twitter or Excel • Other example? • Cyberdust 10-21

  22. Cost Complications • X-inefficiency • Lowest ATC not achieved – why? • Poor management, lack of competition • Example? • PENN-DOT!!!! • Rent seeking behavior – survival • How? • Technological advance • More likely with monopoly? • Depends… are they motivated?

  23. Policy Options • Use antitrust laws • Divide the firm 10-23

  24. Policy Options • Natural monopoly • Regulate price • Ignore • Unstable in long run

  25. Price Discrimination • Three forms • Charge each customer max willingness to pay • Example? • Charge one price for first unit and a lower price for subsequent units • Example? • Charge different customers different prices • Example? 10-25

  26. Price Discrimination • Conditions • Monopoly power over price/output • Market segregation – elasticities • Software Example – pg. 216 • No resale - duh • Examples • Airfares • Electric utilities • Theaters & golf courses 10-27

  27. Regulated Monopoly • Natural monopolies • Rate regulation • Socially optimum price P = MC • Fair return price P = ATC 10-28

  28. Regulated Monopoly Price and Costs (Dollars) 0 Quantity Why does this problem exist? 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 What is the problem with the socially optimal price? Economies of Scale… 10-29

  29. How do you think this process plays out in the real world?

  30. 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” 10-31

  31. Key Terms • pure monopoly • barriers to entry • simultaneous consumption • network effects • X-inefficiency • rent-seeking behavior • price discrimination • socially optimal price • fair-return price 10-32

  32. Next Chapter Preview… Monopolistic Competition and Oligopoly 10-33

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