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Pure Monopoly
CHAPTER TWENTY-FOUR
Copyright McGraw-Hill, Inc., 1999
Four Market Models
Pure Monopoly
Pure
Competition
Market Structure Continuum
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TERMS
Characteristics of Monopoly
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TERMS
Characteristics of Monopoly
• Single Seller
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TERMS
Characteristics of Monopoly
• Single Seller
• No Close Substitutes
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TERMS
Characteristics of Monopoly
• Single Seller
• No Close Substitutes
• “Price Maker”
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TERMS
Characteristics of Monopoly
• Single Seller
• No Close Substitutes
• “Price Maker”
• Blocked Entry
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TERMS
Characteristics of Monopoly
• Single Seller
• No Close Substitutes
• “Price Maker”
• Blocked Entry
• Advertising
importance...
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TERMS
Barriers to Entry
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TERMS
Barriers to Entry
• Economies of Scale
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TERMS
Barriers to Entry
• Economies of Scale
• Legal Barriers: Patents & Licenses
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BACK
TERMS
Barriers to Entry
• Economies of Scale
• Legal Barriers: Patents & Licenses
• Ownership of Essential Resources
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BACK
TERMS
Barriers to Entry
• Economies of Scale
• Legal Barriers: Patents & Licenses
• Ownership of Essential Resources
Monopolies are relatively rare
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Barriers to Entry
• Economies of Scale
• Legal Barriers: Patents & Licenses
• Ownership of Essential Resources
Monopolies are relatively rare
There are times when monopoly is desired
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Average Total Cost
Economies of Scale:
The Natural Monopoly Case
$20
15
10
0
50
Copyright McGraw-Hill, Inc., 1999
100
Quantity
200
BACK
TERMS
Average Total Cost
Economies of Scale:
The Natural Monopoly Case
$20
15
ATC
10
0
50
Copyright McGraw-Hill, Inc., 1999
100
Quantity
200
BACK
TERMS
Average Total Cost
Economies of Scale:
The Natural Monopoly Case
$20
15
ATC
10
If ATC declines over extended output,
least-cost production is realized only if
there is one producer - a natural monopoly
0
50
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100
Quantity
200
BACK
TERMS
Monopoly Demand
3 Basic Assumptions...
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TERMS
Monopoly Demand
3 Basic Assumptions...
• Monopoly Status is Secured
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TERMS
Monopoly Demand
3 Basic Assumptions...
• Monopoly Status is Secured
• Firm is not Governmentally Regulated
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TERMS
Monopoly Demand
3 Basic Assumptions...
• Monopoly Status is Secured
• Firm is not Governmentally Regulated
• Firm charges the same price for all units
Copyright McGraw-Hill, Inc., 1999
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TERMS
Monopoly Demand
3 Basic Assumptions...
• Monopoly Status is Secured
• Firm is not Governmentally Regulated
• Firm charges the same price for all units
Price Exceeds Marginal Revenue
example...
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Monopoly Revenue and Cost
Quantity Price
of (Average Total Marginal
Output Revenue) Revenue Revenue
0
$172 $ 0
1
2
3
4
5
6
7
8
9
10
Copyright McGraw-Hill, Inc., 1999
Average
Total
Cost
Total
Cost
Marginal
Cost
$100
BACK
Profit +
or
loss -
- $100
TERMS
Monopoly Revenue and Cost
Quantity Price
of (Average Total Marginal
Output Revenue) Revenue Revenue
0
$172 $ 0
]
1
162 162
2
3
4
5
6
7
8
9
10
Copyright McGraw-Hill, Inc., 1999
Average
Total
Cost
Total
Cost
Marginal
Cost
$100
]
$162
$190.00 190
BACK
Profit +
or
loss -
- $100
90
- 28
TERMS
Monopoly Revenue and Cost
Quantity Price
of (Average Total Marginal
Output Revenue) Revenue Revenue
0
$172 $ 0
]
1
162 162
2
152
3
142
4
132
5
122
6
112
7
102
8
92
9
82
10
72
Copyright McGraw-Hill, Inc., 1999
Average
Total
Cost
Total
Cost
Marginal
Cost
$100
]
$162
$190.00 190
BACK
Profit +
or
loss -
- $100
90
- 28
TERMS
Monopoly Revenue and Cost
Quantity Price
of (Average Total Marginal
Output Revenue) Revenue Revenue
0
$172 $ 0
]
1
162 162
]
2
152 304
]
3
142 426
]
4
132 528
]
5
122 610
]
6
112 672
]
7
102 714
]
8
92 736 ]
9
82 738
]
10
72 720
Copyright McGraw-Hill, Inc., 1999
Average
Total
Cost
Total
Cost
Marginal
Cost
$100
]
$162
$190.00 190
BACK
Profit +
or
loss -
- $100
90
- 28
TERMS
Monopoly Revenue and Cost
Quantity Price
of (Average Total Marginal
Output Revenue) Revenue Revenue
0
$172 $ 0
]
1
162 162
]
2
152 304
]
3
142 426
]
4
132 528
]
5
122 610
]
6
112 672
]
7
102 714
]
8
92 736 ]
9
82 738
]
10
72 720
Copyright McGraw-Hill, Inc., 1999
Average
Total
Cost
Total
Cost
Marginal
Cost
$100
]
$162
$190.00 190
142
122
102
82
62
42
22
2
- 18
BACK
Profit +
or
loss -
- $100
90
- 28
TERMS
Monopoly Revenue and Cost
Quantity Price
of (Average Total Marginal
Output Revenue) Revenue Revenue
0
$172 $ 0
]
1
162 162
]
2
152 304
]
3
142 426
]
4
132 528
]
5
122 610
]
6
112 672
]
7
102 714
]
8
92 736 ]
9
82 738
]
10
72 720
Copyright McGraw-Hill, Inc., 1999
$162
142
122
102
82
62
42
22
2
- 18
Average
Total
Cost
Total
Cost
Marginal
Cost
$100
]
$190.00 190
135.00
113.33
100.00
94.00
91.67
91.43
93.73
97.78
103.00
BACK
Profit +
or
loss -
- $100
90
- 28
TERMS
Monopoly Revenue and Cost
Quantity Price
of (Average Total Marginal
Output Revenue) Revenue Revenue
0
$172 $ 0
]
1
162 162
]
2
152 304
]
3
142 426
]
4
132 528
]
5
122 610
]
6
112 672
]
7
102 714
]
8
92 736 ]
9
82 738
]
10
72 720
Copyright McGraw-Hill, Inc., 1999
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
Total
Cost
$100
190
270
340
400
470
550
640
750
880
1030
BACK
Marginal
Cost
]
]
]
]
]
]
]
]
]
]
Profit +
or
loss -
- $100
90
- 28
TERMS
Monopoly Revenue and Cost
Quantity Price
of (Average Total Marginal
Output Revenue) Revenue Revenue
0
$172 $ 0
]
1
162 162
]
2
152 304
]
3
142 426
]
4
132 528
]
5
122 610
]
6
112 672
]
7
102 714
]
8
92 736 ]
9
82 738
]
10
72 720
Copyright McGraw-Hill, Inc., 1999
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
Total
Cost
$100
190
270
340
400
470
550
640
750
880
1030
BACK
Marginal
Cost
]
]
]
]
]
]
]
]
]
]
Profit +
or
loss -
- $100
90
- 28
80
70
60
70
80
90
110
130
150
TERMS
Monopoly Revenue and Cost
Quantity Price
of (Average Total Marginal
Output Revenue) Revenue Revenue
0
$172 $ 0
]
1
162 162
]
2
152 304
]
3
142 426
]
4
132 528
]
5
122 610
]
6
112 672
]
7
102 714
]
8
92 736 ]
9
82 738
]
10
72 720
Copyright McGraw-Hill, Inc., 1999
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
Total
Cost
$100
190
270
340
400
470
550
640
750
880
1030
BACK
Marginal
Cost
] 90
] 80
] 70
] 60
] 70
] 80
] 90
] 110
] 130
] 150
TERMS
Profit +
or
loss -
- $100
- 28
+ 34
+ 86
+ 128
+ 140
+ 122
+ 74
- 14
- 142
- 310
Monopoly Revenue and Cost
Quantity Price
of (Average Total Marginal
Output Revenue) Revenue Revenue
Average
Total
Cost
Total
Cost
Marginal
Cost
Profit +
or
loss -
0
$172 $ 0
$100
- $100
] $162
] 90
1
162 162
- 28
$190.00 190
]
] 80
142
2
152 304
+ 34
135.00 270
]
] 70
122
3
142 426
+ 86
113.33 340
]
] 60
102
4
132 528
+ 128
100.00 400
]
] 70
82
5
122 610
+ 140
94.00 470
]
] 80
62
6
112 672
+ 122
91.67 550
]
] 90
42
7
102 714
+ 74
91.43 640
]
] 110
22see the profit
Can
you
8
92 736 ]
- 14
93.73 750
]
2
130
9
82 maximization
738
880
- 142
97.78
point?
]
] 150
- 18
10
72 720
- 310
103.00 1030
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Monopoly Revenue and Cost
Quantity Price
of (Average Total Marginal
Output Revenue) Revenue Revenue
Average
Total
Cost
Total
Cost
Marginal
Cost
Profit +
or
loss -
0
$172 $ 0
$100
- $100
] $162
] 90
1
162 162
- 28
$190.00 190
]
] 80
142
2
152 304
+ 34
135.00 270
]
] 70
122
3
142 426
+ 86
113.33 340
]
] 60
102
4
132 528
+ 128
100.00 400
]
] 70
82
5
122 610
+ 140
94.00 470
]
] 80
62
6
112 672
+ 122
91.67 550
]
] 90
42
7
102 714
+ 74
91.43 640
]
] 110
22see the profit
Can
you
8
92 736 ]
- 14
93.73 750
]
2
130
9
82 maximization
738
880
- 142
97.78
point?
]
] 150
- 18
10
72 720
- 310
103.00 1030
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Price & Marginal Revenue Under Monopoly
P
As price decreases from
$142 to $132...
$142
132
D
1
Copyright McGraw-Hill, Inc., 1999
2
3
4
5
BACK
6
Q
TERMS
Price & Marginal Revenue Under Monopoly
P
$142
132
As price decreases from
$142 to $132...
Revenue losses
occur
Loss = $30
D
1
Copyright McGraw-Hill, Inc., 1999
2
3
4
5
BACK
6
Q
TERMS
Price & Marginal Revenue Under Monopoly
P
$142
132
As price decreases from
$142 to $132...
but revenue will
increase with the
additional
units sold
Loss = $30
D
Gain = $132
1
Copyright McGraw-Hill, Inc., 1999
2
3
4
5
BACK
6
Q
TERMS
Price & Marginal Revenue Under Monopoly
P
$142
132
As price decreases from
$142 to $132...
but revenue will
increase with the
additional
units sold
Loss = $30
Marginal revenue
Gain = $132
will necessarily be
less than price
1
Copyright McGraw-Hill, Inc., 1999
2
3
4
5
BACK
6
D
Q
TERMS
Demand, Marginal Revenue, Total Revenue
Imperfectly Competitive Firm
Dollars
200
Elastic
150
Inelastic
200
50
MR
D
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
Dollars
750
500
250
Copyright 1999
McGraw-Hill, Inc.
TR
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q BACK
TERMS
Demand, Marginal Revenue, Total Revenue
Imperfectly Competitive Firm
Dollars
200
Elastic
150
Inelastic
200
50
MR
D
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
Dollars
750
500
250
Copyright 1999
McGraw-Hill, Inc.
TR
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q BACK
TERMS
Demand, Marginal Revenue, Total Revenue
Imperfectly Competitive Firm
Dollars
200
Elastic
150
Inelastic
200
50
MR
D
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
Dollars
750
500
250
Copyright 1999
McGraw-Hill, Inc.
TR
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q BACK
TERMS
Output and Price Determination
• Cost Data
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Output and Price Determination
• Cost Data
• MR = MC Rule
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Output and Price Determination
• Cost Data
• MR = MC Rule
• No Monopoly Supply Curve
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Output and Price Determination
• Cost Data
• MR = MC Rule
• No Monopoly Supply Curve
• Monopoly Pricing Misconceptions
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Output and Price Determination
• Cost Data
• MR = MC Rule
• No Monopoly Supply Curve
• Monopoly Pricing Misconceptions
Not Highest Price
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Output and Price Determination
• Cost Data
• MR = MC Rule
• No Monopoly Supply Curve
• Monopoly Pricing Misconceptions
Not Highest Price
Total, Not Unit, Profits
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Output and Price Determination
• Cost Data
• MR = MC Rule
• No Monopoly Supply Curve
• Monopoly Pricing Misconceptions
Not Highest Price
Total, Not Unit, Profits
Losses
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Output and Price Determination
• Cost Data
• MR = MC Rule
• No Monopoly Supply Curve
Graphically...
• Monopoly Pricing Misconceptions
Not Highest Price
Total, Not Unit, Profits
Losses
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Profit Maximization Under Monopoly
200
P
175
150
125
100
75
50
25
0
1
Copyright McGraw-Hill, Inc., 1999
2
3
4
5
6
7
8
BACK
9
10
TERMS
Q
Profit Maximization Under Monopoly
200
P
175
150
125
100
D
75
50
25
0
1
Copyright McGraw-Hill, Inc., 1999
2
3
4
5
6
7
8
BACK
9
10
TERMS
Q
Profit Maximization Under Monopoly
200
P
175
150
125
100
D
75
50
25
MR
0
1
Copyright McGraw-Hill, Inc., 1999
2
3
4
5
6
7
8
BACK
9
10
TERMS
Q
Profit Maximization Under Monopoly
200
P
MC
175
150
$122
125
100
D
75
50
25
MR
0
1
Copyright McGraw-Hill, Inc., 1999
2
3
4
5
6
7
8
BACK
9
10
TERMS
Q
Profit Maximization Under Monopoly
200
P
MC
175
150
$122
125
ATC
100
D
75
50
25
MR
0
1
Copyright McGraw-Hill, Inc., 1999
2
3
4
5
6
7
8
BACK
9
10
TERMS
Q
Profit Maximization Under Monopoly
200
P
MC
175
150
$122
$94
125
Profit
100
ATC
D
75
50
25
MR
0
1
Copyright McGraw-Hill, Inc., 1999
2
3
4
5
6
7
8
BACK
9
10
TERMS
Q
Profit Maximization Under Monopoly
200
P
175
150
$122
$94
MC
Profit
Per Unit
125
Profit
100
ATC
D
75
Competitive
Price
50
MR = MC
25
0
1
Copyright McGraw-Hill, Inc., 1999
2
3
MR
4
5
6
7
8
BACK
9
10
TERMS
Q
Profit Maximization Under Monopoly
200
P
175
150
$122
$94
MC
Profit
Per Unit
What About
Profit
Loss Minimization?
125
100
ATC
D
75
Competitive
Price
50
MR = MC
25
0
1
Copyright McGraw-Hill, Inc., 1999
2
3
MR
4
5
6
7
8
BACK
9
10
TERMS
Q
Loss Minimization Under Monopoly
200
P
Loss
Per Unit
175
MC
150
ATC
Loss
125
AVC
100
D
75
50
MR = MC
25
0
1
Copyright McGraw-Hill, Inc., 1999
2
3
MR
4
5
6
7
8
BACK
9
10
TERMS
Q
Loss Minimization Under Monopoly
200
P
Loss
Per Unit
175
MC
150
ATC
What are the
Economic Effects
of Monopoly?
Loss
125
AVC
100
D
75
50
MR = MC
25
0
1
Copyright McGraw-Hill, Inc., 1999
2
3
MR
4
5
6
7
8
BACK
9
10
TERMS
Q
Profit Maximization Under Monopoly
P
S = MC
Monopolist
will sell less
units at a
higher price
than in
competition
Pm
Pc
D
MR
Copyright McGraw-Hill, Inc., 1999
Qm
Qc
Q
BACK
TERMS
Cost Complications
• Economies of Scale
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Cost Complications
Unit costs (dollars)
• Economies of Scale
• X-Inefficiency
Quantity
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Cost Complications
Unit costs (dollars)
• Economies of Scale
• X-Inefficiency
Average
Total Costs
Quantity
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Cost Complications
• Economies of Scale
Inefficient internal
• X-Inefficiency
Unit costs (dollars)
operation leads to
higher-thannecessary costs
Average
Total Costs
Qc
Copyright McGraw-Hill, Inc., 1999
Quantity
Qm
BACK
TERMS
Cost Complications
Unit costs (dollars)
• Economies of Scale
Inefficient internal
• X-Inefficiency
ATCX
ATC’X
Qc
Copyright McGraw-Hill, Inc., 1999
operation leads to
higher-thannecessary costs
Quantity
Average
Total Costs
Qm
BACK
TERMS
Cost Complications
• Economies of Scale
• X-Inefficiency
• Rent-Seeking Expenditures
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Cost Complications
• Economies of Scale
• X-Inefficiency
• Rent-Seeking Expenditures
Technological Progress:
Dynamic Efficiency
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Cost Complications
• Economies of Scale
• X-Inefficiency
• Rent-Seeking Expenditures
Technological Progress:
Dynamic Efficiency
• The Competitive Model
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Cost Complications
• Economies of Scale
• X-Inefficiency
• Rent-Seeking Expenditures
Technological Progress:
Dynamic Efficiency
• The Competitive Model
• The Monopoly Model
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Cost Complications
• Economies of Scale
• X-Inefficiency
• Rent-Seeking Expenditures
Technological Progress:
Dynamic Efficiency
• The Competitive Model
• The Monopoly Model
• A Mixed Picture
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Cost Complications
• Economies of Scale
• X-Inefficiency
• Rent-Seeking Expenditures
Two Policy Options
Technological Progress:
Antitrust
Dynamic Efficiency
Public
Utility Regulation
• The
Competitive
Model
• The Monopoly Model
• A Mixed Picture
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Price Discrimination
Conditions...
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Price Discrimination
Conditions...
1 - Monopoly Power
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Price Discrimination
Conditions...
1 - Monopoly Power
2 - Market Segregation
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Price Discrimination
Conditions...
1 - Monopoly Power
2 - Market Segregation
3 - No Resale
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Price Discrimination
Conditions...
1 - Monopoly Power
2 - Market Segregation
3 - No Resale
Consequences...
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Price Discrimination
Conditions...
1 - Monopoly Power
2 - Market Segregation
3 - No Resale
Consequences...
1 - More Profits
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Price Discrimination
Conditions...
1 - Monopoly Power
2 - Market Segregation
3 - No Resale
Consequences...
1 - More Profits
2 - More Production
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Price Discrimination
Conditions...
1 - Monopoly Power
2 - Market
Segregation
Graphically...
3 - No Resale
Consequences...
1 - More Profits
2 - More Production
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Single Price Vs. Price Discrimination
MC
Price and Costs
P
ATC
D
MR
Copyright McGraw-Hill, Inc., 1999
Q1
Q
BACK
TERMS
Single Price Vs. Price Discrimination
MC
Profits with
a single price
Price and Costs
P
ATC
D
MR
Copyright McGraw-Hill, Inc., 1999
Q1
Q
BACK
TERMS
Single Price Vs. Price Discrimination
Price and Costs
P
Profits with
price
discrimination
MC
ATC
D = MR
Copyright McGraw-Hill, Inc., 1999
Q1
Q2
Q
BACK
TERMS
Regulated Monopoly
Price and Costs
P
ATC
MC
D
MR
Q
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Regulated Monopoly
Price and Costs
P
Socially Optimum Price
Price = MC
ATC
MC
D
MR
Q
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Regulated Monopoly
Price and Costs
P
Fair Return Price
Price = ATC
ATC
MC
D
MR
Q
Copyright McGraw-Hill, Inc., 1999
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TERMS
Regulated Monopoly
Price and Costs
P
Monopoly Price
MR = MC
ATC
MC
D
MR
Q
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
Regulated Monopoly
Price and Costs
P
Monopoly Price
MR = MC
Dilemma
of
ATC
Regulation MC
D
MR
Q
Copyright McGraw-Hill, Inc., 1999
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TERMS
Questions & Discussion
Copyright McGraw-Hill, Inc., 1999
BACK
TERMS
 pure
monopoly
 barriers to entry
 X-inefficiency
 rent-seeking behavior
 price discrimination
 socially optimal price
 fair-return price
 dilemma of regulation
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END
Monopolistic
Competition
& Oligopoly
Is Next...
Chapter 25
Copyright McGraw-Hill, Inc., 1999