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10 Pure Monopoly An Introduction to Pure Monopoly • Single seller – a sole producer • No close substitutes – unique product • Price maker – control over price • Blocked entry – strong barriers to • entry block potential competition Non-price competition – mostly PR or advertising the product 10-2 LO1 Examples of Monopoly • Public utility companies • Natural Gas • Electric • Water • Near monopolies • Intel • Wham-O • Professional Sports Teams LO1 10-3 Barriers to Entry • Barrier to Entry: a factor that keeps firms from entering an industry. • Economies of Scale • Legal Barriers: Patents and Licenses • Ownership of Essential Resources • Pricing 10-4 LO1 Economies of Scale $20 15 ATC 10 50 100 200 10-5 LO1 Monopoly Demand • The pure monopolist is the industry • Demand curve is the market demand • LO1 curve • Downsloping demand curve Marginal revenue is less than price 10-6 Monopoly Demand Table 10.1 Revenue and Cost Data of a Pure Monopolist Revenue Data (1) Quantity of Output (2) Price (Average Revenue) Cost Data (3) Total Revenue (1) X (2) (4) Marginal Revenue 0 $ 172 $0 1 162 162 2 152 304 142 3 142 426 4 132 528 5 122 6 112 7 (5) Average Total Cost (6) Total Cost (1) X (5) (7) Marginal Cost $ 100 $ 162 $ 190.00 (8) Profit (+) or Loss (-) $ -100 190 $ 90 -28 135.00 270 80 +34 122 113.33 340 70 +86 102 100.00 400 60 +128 610 82 94.00 470 70 +140 672 62 91.67 550 80 +122 102 714 42 91.43 640 90 +74 8 92 736 22 93.75 750 110 -14 9 82 738 2 97.78 880 130 -142 10 72 720 -18 103.00 1030 150 -310 10-7 LO1 Monopoly Demand • All customers must pay the same price Loss = $30 D Gain = $132 10-8 LO1 Monopoly Demand • All customers must pay the same price Loss = $30 D Gain = $132 MR LO1 10-9 Monopoly Demand • Marginal Revenue < Price • Monopolist is a price maker • Monopolist sets prices in elastic region of demand curve 10-10 LO2 Output and Price Determination Demand and Marginal-Revenue Curves Elastic Inelastic D MR Total-Revenue Curve TR 10-11 LO2 Output and Price Determination Steps for Graphically Determining the Profit-Maximizing Output, ProfitMaximizing Price, and Economic Profits (if Any) in Pure Monopoly Step 1 Determine the profit-maximizing output by finding where MR=MC. Step 2 Determine the profit-maximizing price by extending a vertical line upward from the output determined in step 1 to the pure monopolist’s demand curve. Step 3 Determine the pure monopolist’s economic profit by using one of two methods: Method 1. Find profit per unit by subtracting the average total cost of the profit-maximizing output from the profit-maximizing price. Then multiply the difference by the profit-maximizing output to determine economic profit (if any). Method 2. Find total cost by multiplying the average total cost of the profit-maximizing output by that output. Find total revenue by multiplying the profit-maximizing output by the profit-maximizing price. Then subtract total cost from total revenue to determine the economic profit (if any). LO2 10-12 Output and Price Determination Price, Costs, and Revenue $200 175 Pm=$122 MC 150 125 100 75 Economic Profit ATC D A=$94 MR=MC 50 25 0 MR 1 2 3 4 5 6 Quantity 7 8 9 10 10-13 LO2 Misconceptions of Monopoly Pricing • Not highest price • Total profit • Possibility of losses 10-14 LO2 Misconceptions of Monopoly Pricing MC A Pm ATC Loss AVC V D MR=MC MR 0 LO2 Qm 10-15 Economic Effects of Monopoly Pure competition is efficient Monopoly is inefficient S=MC MC P=MC= Minimum ATC Pc Pm Pc b d c a D D MR Qm Qc Qc (a) Purely Competitive Market (b) Pure Monopoly 10-16 LO3 Economic Effects of Monopoly • Income transfer • Cost complications • Economies of scale • X-Inefficiency • Rent seeking expenditures • Technological advance 10-17 LO3 X-Inefficiency X ATCx ATC1 X' ATCx' Average total cost ATC2 Q1 LO3 Q2 10-18 Assessment and Policy Options • Antitrust laws • Break up the firm • Regulate it • Government determines price and • quantity Ignore it • Let time and markets get rid of monopoly 10-19 LO3 Global Perspective Competition from Foreign Multinational Corporations 10-20 LO3 Price Discrimination • Price discrimination • Charging different buyers different • LO4 prices • Price differences are not based on cost differences Conditions for success: • Monopoly power • Market segregation • No resale 10-21 Examples of Price Discrimination • Business travel • Electric utilities • Movie theaters • Golf courses • Railroad companies • Coupons • International trade 10-22 LO4 Graphical Analysis P P Economic profit Pb Economic profit MC = ATC Qb MRb Db (a) Small businesses Ps MC = ATC Qs Ds MRs (b) Students 10-23 LO4 Regulated Monopoly • Natural monopolies • Socially optimal price • Set price = marginal cost • Fair return price • Set price = ATC LO5 10-24 Regulated Monopoly Monopoly Price Pm Pf Fair-Return Price a f Pr Socially Optimal Price r MR Qm b Qf ATC MC D Qr 10-25 LO5 De Beers’s Diamonds • De Beers once controlled about 80% • • of the world’s diamond market Monopoly position eroded over time • New diamond discoveries • Nearly perfect artificial diamonds • Unfavorable media attention Now focus on increasing demand for diamonds rather than controlling supply 10-26