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Eco 2023
Chapter 11
Pure Monopoly
Pure monopoly: exists when a single firm is the sole producer of a product
for which there are no close substitutes.
Characteristics:
o Single seller
o No close substitutes
o Price maker – monopolist controls the total quantity supplied and thus
has considerable control over price
o Downward sloping demand – it can change its price by changing the
quantity of the product it supplies/
o Barriers to entry –
o Have no competitors because certain barriers keep potential
competitors from entering the industry.
 Economic
 Technological
 Legal
o Nonprice competition – the product produced by the pure monopolist
may be either standardized or differentiated.
Examples:
o Utilities
o Near monopolies
o Intel
o De Beers
Barriers to Entry:
o Factors that prohibit firms from entering the industry
o Strong barriers effectively block all potential competitors
o Types
o Economies of Scale
Created by M. Mari
Fall 2003-1
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 Declining average total cost with added firm size are
extensive
 Therefore, firms will face lower cost the larger the output
 New firms that try to enter the industry as small scale
producers cannot realize the cost economies of the
monopolist and therefore cannot obtain the normal profits
necessary for survival or growth
 Natural monopoly – the demand curve cuts the long-run
ATC curve where average total costs are still declining
 Its lower unit cost would enable it to charge a
lower price than if the industry were more
competitive
o Legal Barriers
 Patents – is the exclusive right of an inventor to use, or to
allow another to use, her or his invention
 20 years
 Offsets Research and Development costs
 Licenses – government may also limit entry into an
industry by licensing
o Control over Essential Resource
 Can use private property as an obstacle
Monopoly Demand
o The demand curve for the monopolist is very different from that of the
pure competitor.
o Because the monopolist is the industry, its demand curve is the market
demand curve
o Downward sloping
o Implications of downward sloping demand curve
o Marginal Revenue < Price
 It can increase sales only by charging a lower price.
 Total revenue will increase at a diminishing rate
 Marginal revenue curve lies below the demand curve
 Indicating that marginal revenue is less than price
at every output quantity but the very first unit.
 Marginal revenue > 0 when Total revenue is
increasing
Created by M. Mari
Fall 2003-1
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 Marginal revenue = O when total revenue is
maximized
 Marginal revenue < 0 when total revenue is
decreasing
o Monopolist is a price maker
 So firms with downward sloping demand curve can
influence the market price by influencing supply
o Monopolist sets price in the elastic region of the demand
 Since when demand is elastic, a decline in price will
increase total revenue.
 Monopolist will produce in the elastic region of the
demand curve
Q
P
TR
MR ATC
TC
MC Profit
0
172
0
0
100
-100
162
90
1
162
162
190
190
-28
142
80
2
152
304
135
270
34
122
70
3
142
426
113.33 340
86
102
60
4
132
528
100
400
128
82
70
5
122
610
94
470
140
62
80
6
112
672
91.67 550
122
42
90
7
102
714
91.43 640
74
Graph for Demand and Marginal Revenue
Created by M. Mari
Fall 2003-1
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Output and Price Determination
o Profit maximization at
o Marginal Revenue = Marginal Cost
o Graph
o Monopolist seeks maximum total profit, not maximum unit
profit
o Can have losses in the short run
Economic Effects of Monopoly
o Price > MC and Price > ATC
o Not productive or allocative efficient
Created by M. Mari
Fall 2003-1
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Price Discrimination
o Under certain conditions the monopolist can increase its profit by
charging different prices to different buyers
o Conditions
o Monopoly power – some control over output and price
o Market segregation – seller must be able to segregate buyers
into distinct classes, each of which has a different willingness
or ability to pay for the product
o No resale –
o Consequences
o More profit
o More production
Regulated monopoly
o Natural monopolies have been subject to rate regulation
o Achieve P = MC or P = ATC
Created by M. Mari
Fall 2003-1
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