Download Pure Monopoly Characteristics 1. Only one supplier in the industry 2

L-12, MM
Pure Monopoly
Characteristics
1. Only one supplier in the industry
2. Product is unique (no close substitutes)
3. Entry is extremely difficult or prohibited by law
Examples
The monopolist faces the industry demand curve, which is
downward sloping.
P
D of the industry
Q
Monopolist is a price “maker”--- it can “set” the price along the
demand curve.
It chooses a point (price and quantity combination) along the
demand curve to maximize its profit
The Monopolist’s supply decision
1
Total revenue
=PXQ
Marginal Revenue
is the addition to the total revenue resulting from one more
unit of sale of the product.
∆ TR
MR = ------------------∆ Q
Demand and revenues for Viagra, a monopolist product
Quantity
Price
Total Revenue
Marginal
(10million)
($)
($)
Revenue ($)
PXQ
1
15
15
2
14
28
13
3
13
39
11
4
12
48
9
5
11
55
7
6
10
60
5
7
9
63
3
8
8
64
1
9
7
63
-1
10
6
60
-3
2
Demand and Marginal Revenue for Viagra,
A monopolist product
16
14
Demand
Marginal revenue
12
10
8
$ 6
4
2
0
-2 1
2
3
4
5
6
7
8
9
10
-4
Quantity
If the demand curve is a downward sloping straight line, then the
marginal revenue curve is a line below the demand curve.
Profit Maximization
Quantity
Price
(10million)
($)
1
2
3
4
5
6
7
8
9
10
15
14
13
12
11
10
9
8
7
6
Marginal Revenue
($)
Marginal Cost
($)
13
11
9
7
5
3
1
-1
-3
14
7
2
1
1.5
2
3
4
5
6
3
If MR > MC, it pays for the firm to expand the production
If MR < MC, it pays for the firm to reduce production.
Insight.
P
MC
P
D
0
Q
Q*
MR
The rule for profit maximization for the monopolist
MR = MC
The monopolist charges the price at P, where Q* intersects the
demand curve.
The Mark-up by the monopolist
P > MC
4
Monopoly profit (Monopoly rent)
P
MC
ATC
Monopoly
profit (rent)
P
D
0
Q
Q*
MR
A monopolist is protected by high barriers of entry
5
The case against the monopoly
1. restricting the output and raise the price
2. restricting entry and keep the high monopoly price in the
long run
3. not producing at the minimum ATC
4. not producing at the point MU = MC, resulting in
efficiency loss or economic welfare loss.
P
MC
ATC
P
D = MU
0
Q
Q*
MR
Anti-trust and anti-monopoly law
Sherman Act
6