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10 Pure Monopoly McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Objectives Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show 10-2 • Characteristics of Pure Monopoly • How Pure Monopoly Sets Profit Maximizing Output and Price • The Economic Effects of Monopoly • Why A Monopolist May Wish to Charge Different Prices in Different Markets Copyright 2008 The McGraw-Hill Companies Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word FOUR MARKET MODELS Pure Monopoly: • Single Seller • No Close Substitutes • Price Maker • Blocked Entry • Nonprice Competition Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Key Terms Market Structure Continuum End Show 10-3 Copyright 2008 The McGraw-Hill Companies Examples of Monopoly • Public utility companies • Natural Gas • Electric • Water • Near monopolies • Intel • Wham-O (Frisebee) • Professional Sports Teams LO1 10-4 Barriers to Entry Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show 10-5 • Economies of Scale • Legal Barriers to Entry O 10.2 –Patents –Licenses • Ownership or Control of Essential Resources • Pricing and Other Strategic Barriers to Entry Copyright 2008 The McGraw-Hill Companies Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms Average Total Cost 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 End Show 10-6 Copyright 2008 The McGraw-Hill Companies 100 Quantity 200 Monopoly Demand Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show 10-7 • Monopoly Status is Secure • No Governmental Regulation • Firm is a Single-Price Monopolist (No Price Discrimination) Copyright 2008 The McGraw-Hill Companies Price and Marginal Revenue Marginal Revenue is Less Than Price Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word • A Monopolist is Selling 3 Units at $142 • To Sell More (4), $142 Price Must Be 132 Lowered to $132 122 • All Customers Must Pay the Same 112 Price 102 • TR Increases $132 92 Minus $30 (3x$10) D Gain = $132 82 0 Key Terms End Show 10-8 Loss = $30 Copyright 2008 The McGraw-Hill Companies 1 2 3 4 5 6 Price and Marginal Revenue Marginal Revenue is Less Than Price Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms • A Monopolist is Selling 3 Units at $142 • To Sell More (4), $142 Price Must Be 132 Lowered to $132 122 • All Customers Must Pay the Same 112 Price 102 • TR Increases $132 92 Minus $30 (3x$10) 82 • $102 Becomes a Point on the MR Curve • Try Other Prices to Determine Other 0 MR Points Loss = $30 D Gain = $132 MR 1 2 3 4 5 6 The Constructed Marginal Revenue Curve Must Always Be Less Than the Price End Show 10-9 Copyright 2008 The McGraw-Hill Companies Monopoly Revenue and Costs Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms • Monopolist is a Price Maker (MR < P) • Sets Price in the Elastic Region • Output and Price Determination –Cost Data –MR = MC Rule • No Supply Curve End Show G 10.1 W 10.1 10-10 Copyright 2008 The McGraw-Hill Companies Monopoly Revenue and Costs Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms Revenue and Cost Data of a Pure Monopolist Cost Data Revenue Data (2) Price (1) Quantity (Average Of Output Revenue) 0 1 2 3 4 5 6 7 8 9 10 $172 162 152 142 132 122 112 102 92 82 72 (3) Total Revenue (1) X (2) $0 ] 162 ] 304 ] 426 ] 528 ] 610 ] 672 ] 714 ] 736 ] 738 ] 720 (4) Marginal Revenue $162 142 122 102 82 62 42 22 2 -18 (5) (6) (7) (8) Average Total Cost Marginal Profit (+) Total Cost (1) X (5) Cost or Loss (-) $190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.75 97.78 103.00 $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 Can you See Profit Maximization? End Show 10-11 Copyright 2008 The McGraw-Hill Companies Monopoly Revenue and Costs Demand, Marginal Revenue, and Total Revenue for a Pure Monopolist $200 Demand and Marginal Revenue Curves Elastic Inelastic Price 150 100 50 D MR 0 2 4 $750 Total Revenue Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word 6 8 10 12 Total-Revenue Curve 14 16 500 250 TR Key Terms End Show 0 10-12 18 2 Copyright 2008 The McGraw-Hill Companies 4 6 8 10 12 14 16 18 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 10-13 Profit Maximization By A Pure Monopolist Key Terms $200 Price, Costs, and Revenue Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word 175 MC 150 Pm=$122 125 100 75 Economic Profit ATC A=$94 D MR=MC 50 25 0 MR 1 2 3 4 5 6 Quantity End Show 10-14 Copyright 2008 The McGraw-Hill Companies 7 8 9 10 Misconceptions Concerning Monopoly Pricing Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word • Not the Highest Price • Total, Not Unit, Profit • Possibility of Losses Key Terms End Show 10-15 Copyright 2008 The McGraw-Hill Companies Loss Minimization Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms Price, Costs, and Revenue By A Pure Monopolist MC A Pm ATC Loss AVC V D MR=MC MR 0 Qm Quantity End Show 10-16 Copyright 2008 The McGraw-Hill Companies Economic Effects of Monopoly Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show 10-17 Price, Output, and Efficiency Pure Monopoly Purely Competitive Market S=MC MC Pm P=MC= Minimum ATC Pc b c Pc a D D MR Qc Qm Qc Pure Competition is Efficient Monopoly Price is Greater Than MC And Is Therefore Inefficient Copyright 2008 The McGraw-Hill Companies Economic Effects of Monopoly Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Price, Output, and Efficiency • Income Transfer • Cost Complications • Economies of Scale – Simultaneous Consumption – Network Effects Key Terms End Show 10-18 Copyright 2008 The McGraw-Hill Companies Economic Effects of Monopoly Key Terms End Show 10-19 • X-Inefficiency Average Total Costs Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word O 10.3 X ATCX Average Total Cost ATC1 X’ ATCX’ ATC2 Q1 Quantity Q2 • Rent-Seeking Expenditures – Rent-Seeking Behavior • Technological Advance • Assessment and Policy Options Copyright 2008 The McGraw-Hill Companies Economic Effects of Monopoly Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show GLOBAL PERSPECTIVE Representative Highly Competitive Foreign Multinational Corporations Company (Country) Bayer (Germany) BP Amoco (United Kingdom Michelin (France) NEC (Japan) Nestlé (Switzerland) Nokia (Finland) Royal Dutch/Shell (Netherlands) Royal Philips (Netherlands) Sony (Japan) Toyota (Japan) Unilever (Netherlands) Main Products Chemicals Gasoline Tires Computers Food Products Wireless Phones Gasoline Electronics Electronics Automobiles Food Products Source: Fortune.com 10-20 Copyright 2008 The McGraw-Hill Companies Price Discrimination Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show 10-21 • Three Forms O 10.4 – Charging Each Customer the Maximum They Are Willing to Pay – Charging Each Customer One Price For The First Set of Units Purchased and a Lower Price for Subsequent Units – Charging Some Customers One Price and a Different Price for Other Customers Copyright 2008 The McGraw-Hill Companies Price Discrimination Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show 10-22 • Conditions – Monopoly Power – Market Segregation – No Resale • Examples of Price Discrimination – Airfares – Electric Utilities – Theaters & Golf Courses Copyright 2008 The McGraw-Hill Companies W 10.1 PRICE DISCRIMINATION Price and Costs Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word P Economic profits with a single MR=MC price ATC MR Key Terms End Show 10-23 Copyright 2008 The McGraw-Hill Companies MC Q1 D Q PRICE DISCRIMINATION Price and Costs Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word P A perfectly discriminating monopolist has MR=D, producing more product and more profit! ATC MR=D D Key Terms End Show 10-24 MC Copyright 2008 The McGraw-Hill Companies Q1 Q2 Q PRICE DISCRIMINATION Economic profits with price discrimination Price and Costs Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word P ATC MR=D D Key Terms End Show 10-25 MC Copyright 2008 The McGraw-Hill Companies Q1 Q2 Q Regulated Monopoly Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms • Natural Monopolies • Rate Regulation • Socially Optimum Price P = MC • Fair Return Price P = ATC End Show 10-26 Copyright 2008 The McGraw-Hill Companies Regulated Monopoly Key Terms Dilemma of Regulation Monopoly Price Price and Costs (Dollars) Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Pm Fair-Return Price f Pf a ATC Pr r b Qm Qf Quantity End Show Copyright 2008 The McGraw-Hill Companies MC D MR 0 10-27 Socially Optimal Price Qr De Beers Diamonds Are Monopolies Forever? Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show 10-28 • 66 Year Policy of Monopolizing the Diamond Trade • Mid-2000 Abandoned Monopoly Efforts • Decline in Number of Select Dealers and Cutters • Classic Monopoly Behavior – Pricing – Single-Channel Marketing Copyright 2008 The McGraw-Hill Companies 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 10-30 Key Terms Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show 10-31 • • • • • • • • • pure monopoly barriers to entry simultaneous consumption network effects X-inefficiency rent-seeking behavior price discrimination socially optimal price fair-return price Copyright 2008 The McGraw-Hill Companies Next Chapter Preview… Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Monopolistic Competition and Oligopoly Key Terms End Show 10-32 Copyright 2008 The McGraw-Hill Companies
