Download Chapter 24 - Pure Monopoly

24
C HAPTE R
Pure
Monopoly
1
FOUR MARKET MODELS
Pure Monopoly:
• Single Seller
• No Close Substitutes
• Price Maker
• Blocked Entry
• Nonprice Competition
Pure
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
2
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
3
MONOPOLY DEMAND
3 Basic Assumptions:
1. Monopoly Status is Secure
2. No Governmental Regulation
3. Firm Charges the Same Price
for all Units Sold
Market Demand Curve is the
Firm’s Demand Curve
4
• The monopolist sets the price in the elastic
region of demand
• In the elastic region of demand lower price
leads to higher total revenue
• The monopolist avoids the inelastic region in
the demand curve.
5
• In competitive markets:
• Demand is perfectly elastic demand
• Each unit sold will add the amount of constant
product price to total revenue.
• P = MR(constant)
• In pure monopoly:
• The monopolist is the market
• The demand is the market demand
• The demand is downward sloping
• Qd increases as P decreases
6
MONOPOLY REVENUES & COSTS
Revenue Data
Quantity Price
of (Average
Output Revenue)
0
1
2
3
4
5
6
7
8
9
10
$172
162
152
142
132
122
112
102
92
82
72
Marginal
Revenue
$162
142
122
102
82
62
42
22
2
- 18
7
MONOPOLY REVENUES & COSTS
Revenue Data
Quantity Price
of (Average
Output Revenue)
0
1
2
3
4
5
6
7
8
9
10
$172
162
152
142
132
122
112
102
92
82
72
Marginal
Revenue
$162
142
122
102
82
62
42
22
2
- 18
Note that P > MR
(except 1 unit)
8
$
MC
MR
D
Q
9
$
MC
MC = MR
MR
MR
Q*
D
Q
10
$
MC
Pm
MC = MR
MR
MR
Q*
Recall
P>MR!
D
Q
11
$
MC
Pm
MC = MR
MR
MR
Q*
Recall
P>MR!
D
Q
12
$
Note that ATC
minimum = (MR=MC)
MC
Pm
ATC
MR
MR
D
Q
13
• Profit maximization rule of monopolist
MR = MC
And MC ≠ P
• Note that price > MR
• Loss minimization rule
MR = MC
14
• The monopolist has no supply curve (MC ≠ P)
• The monopolist equates MR and MC to
determine output
• The monopolist does not set the highest
possible price. Monopolist goal is maximum
profit not maximum price.
• Higher price may lead to less profit.
15
MONOPOLY REVENUES & COSTS
Revenue Data
Quantity Price
of (Average Total
Marginal
Output Revenue) Revenue Revenue
0 x $172 = $ 0
Cost Data
Average
Total
Cost
Profit +
Total Marginal or
loss Cost
Cost
- $100
= - $100
16
MONOPOLY REVENUES & COSTS
Revenue Data
Quantity Price
of (Average Total
Marginal
Output Revenue) Revenue Revenue
Cost Data
Average
Total
Cost
Profit +
Total Marginal or
loss Cost
Cost
0 $172 $ 0
$100 90 - $100
] $162
]
x
1
162 = 162
- 28
$190.00 190 =
MR = $162 – 0 = $162
MC = $190 – 100 = $90
MR > MC
Loss Improvement
from -$100 to -$28
Check next unit of
output!
17
MONOPOLY REVENUES & COSTS
Revenue Data
Quantity Price
of (Average Total
Marginal
Output Revenue) Revenue Revenue
0
1
2
3
4
5
6
7
8
9
10
$172 $ 0
]
162 162
]
152 304
]
142 426
]
132 528
]
122 610
]
112 672
]
102 714 ]
92 736 ]
82 738 ]
72 720
Cost Data
Average
Total
Cost
$162
$190.00
142
135.00
122
113.33
102
100.00
82
94.00
62
91.67
42
91.43
22
93.73
2
97.78
- 18
103.00
Profit +
Total Marginal or
loss Cost
Cost
$100
]
190
]
270
]
340
]
400
]
470
]
550
]
640 ]
750 ]
880 ]
1030
90
80
70
60
70
80
90
110
130
150
- $100
- 28
+ 34
+ 86
+ 128
+ 140
+ 122
+ 74
- 14
- 142
- 310
18
MONOPOLY REVENUES & COSTS
Revenue Data
Quantity Price
of (Average Total
Marginal
Output Revenue) Revenue Revenue
Can0 you
$172see
$ profit
0
] $162
1
162 162
maximization?
] 142
2
3
4
5
6
7
8
9
10
152
142
132
122
112
102
92
82
72
304
] 122
426
] 102
528
] 82
610
] 62
672
] 42
714 ]
22
736 ]
2
738 ]
- 18
720
Cost Data
Average
Total
Cost
Profit +
Total Marginal or
loss Cost
Cost
$100 90 - $100
]= MC
MR
>
- 28
$190.00 190 80
]
135.00 270 70 + 34
]
113.33 340 60 + 86
]
100.00 400 70 + 128
]
94.00 470 80 + 140
]
91.67 550 90 + 122
]
91.43 640 ] 110 + 74
- 14
93.73 750 ] 130
97.78 880 ] 150 - 142
- 310
103.00 1030
19