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Pure Monopoly

24. C H A P T E R. Pure Monopoly. Pure Monopoly. Pure Competition. Monopolistic Competition. Oligopoly. Market Structure Continuum. FOUR MARKET MODELS. Pure Monopoly:. Single Seller No Close Substitutes Price Maker Blocked Entry Nonprice Competition. MONOPOLY EXAMPLES.

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Pure Monopoly

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  1. 24 C H A P T E R Pure Monopoly

  2. Pure Monopoly Pure Competition Monopolistic Competition Oligopoly Market Structure Continuum FOUR MARKET MODELS Pure Monopoly: • Single Seller • No Close Substitutes • Price Maker • Blocked Entry • Nonprice Competition

  3. MONOPOLY EXAMPLES • Pure Monopoly • Regulated Monopoly • Near Monopolies • Dual Objectives of the Study • Monopoly as a Market Structure • To Better Understand Other Market Structures

  4. BARRIERS TO ENTRY • Economies of Scale • The Natural Monopoly Case • Legal Barriers to Entry • Patents • Licenses • Ownership or Control of Essential Resources • Pricing and Other Strategic Barriers to Entry

  5. THE NATURAL MONOPOLY CASE $20 15 ATC Average Total Cost 10 If ATC declines over extended output, least-cost production is realized only if there is one producer - a natural monopoly 0 50 100 200 Quantity

  6. MONOPOLY DEMAND • 3 Basic Assumptions: • Monopoly Status is Secure • No Governmental Regulation • Firm Charges the Same Price for all Units Sold • Market Demand Curve is the Firm’s Demand Curve

  7. MONOPOLY DEMAND P As price decreases from $142 to $132... but revenue will increase with the additional unit sold $142 132 Loss = $30 D Gain = $132 Q 1 2 3 4 5 6

  8. MR > = MC ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] MONOPOLY REVENUES & COSTS Revenue Data Cost Data Quantity of Output Price (Average Revenue) Average Total Cost Profit + or loss - Total Revenue Marginal Revenue Total Cost Marginal Cost 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 Can you see profit maximization? $190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.73 97.78 103.00

  9. ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] MONOPOLY REVENUES & COSTS Revenue Data Cost Data Quantity of Output Price (Average Revenue) Average Total Cost Profit + or loss - Total Revenue Marginal Revenue Total Cost Marginal Cost 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 93.73 97.78 103.00

  10. MONOPOLY REVENUES & COSTS Elastic Inelastic $200 150 200 50 Dollars MR D Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 $750 500 250 Dollars TR Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

  11. OUTPUT AND PRICE DETERMINATION • Cost Data • MR = MC Rule • No Monopoly Supply Curve • Monopoly Pricing Misconceptions • Not Highest Price • Total, Not Unit, Profit • Possibility of Losses Graphically…

  12. 200 175 150 125 100 75 50 25 Price, costs, and revenue Q 0 1 2 3 4 5 6 7 8 9 10 OUTPUT AND PRICE DETERMINATION Profit Maximization Under Monopoly Remember the MR=MC Rule? Profit Per Unit MC $122 Profit ATC $94 D MR = MC MR

  13. Since Pm exceeds AVC, the firm will produce 200 175 150 125 100 75 50 25 Price, costs, and revenue Q 0 1 2 3 4 5 6 7 8 9 10 OUTPUT AND PRICE DETERMINATION Loss Minimization Under Monopoly Loss Per Unit MC ATC A Loss AVC Pm V D MR = MC MR Qm

  14. An industry in pure competition sells where supply and demand are equal INEFFICIENCY OF PURE MONOPOLY P S = MC At MR=MC A monopolist will sell less units at a higher price than in competition Pm Pc D MR Q Qm Qc

  15. PRICE DISCRIMINATION Conditions Monopoly Power Market Segregation No Resale Consequences More Profit More Production Graphically…

  16. PRICE DISCRIMINATION MC Economic profits with a single MR=MC price P ATC Price and Costs D MR Q Q1

  17. PRICE DISCRIMINATION MC Economic profits with price discrimination P ATC Price and Costs MR=D D Q Q1 Q2

  18. REGULATED MONOPOLY Natural Monopolies • Rate Regulation • Socially Optimum Price • P = MC • Fair-Return Price • P = ATC • Dilemma of Regulation Graphically…

  19. REGULATED MONOPOLY Dilemma of Regulation Which Price? P MR = MC Fair-Return Price Pm Socially-Optimum Price Price and Costs ATC Pf MC Pr D MR Q Qm Qf Qr

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