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Chapter 12 – Pure Monopoly
What are the characteristics of Pure
Monopoly?
Single seller
No close substitutes
Blocked entry
Chapter 12 – Pure Monopoly
• What are the market conditions that
create a Pure Monopoly?
• Barriers to Entry:
Economies of Scale
Patents and licenses
Others on p. 257
A monopoly is a price maker.
Price
What does this mean?
Because the firm is the
entire industry, it decides
output levels for the
entire market.
It then sets price based
on market demand for
the product at that level
of output.
P1
P2
0
D
Q1
The demand curve, for
the monopoly is
downward sloping.
Q2 Quantity
Marginal Revenue and Price
• In monopoly, price and marginal revenue are
not the same.
• This is because of the monopoly’s downwardsloping demand curve.
• To increase output, the monopolist must lower
price, not just for the next unit, but for all units.
Marginal Revenue and Price
• Example: if the monopolist could sell 10 units at
$100 each, but had to lower the price to $99 to
sell 11 units, what is the marginal revenue of the
eleventh unit?
•
10 x 100 = $1000
•
11 x 99 = $1089
• Total revenue goes up by $89, so marginal
revenue is $89, not the $99 price.
Price
For a monopoly, marginal revenue is always
less than price.
0
Marginal
Revenue
Demand
Quantity
Price
How does a monopolist maximize profit?
Set output where MR = MC.
MC
D
0
MR
QM
Quantity
What price does the monopolist charge?
Price
Follow the quantity where MR = MC up to the
demand curve.
MC
PM
D
0
MR
QM
Quantity
Notice the inefficiency in a monopoly:
Price
1. Output is less than where MC = Demand (MB to consumers)
2. Price is greater than marginal cost.
MC
PM
D
0
MR
QM
Quantity
Price
What is the area of profit or loss for the
monopolist?
PM
MC
ATC
Profit
D
0
MR
QM
Quantity
Price
Does the monopolist always make a profit?
PM
0
MC
ATC
Loss
MR
QM
D
Quantity
And finally, what happens to output when a
monopoly’s costs change?
Price
MC
ATC
PM
P2
D
0
MR
QMQ2
Quantity
For the profit-maximizing monopolist, identify:
a. Output
b. Price
c. Total Profit
d. Socially optimal (allocatively efficient) output
e. Socially optimal (efficient) price at profit-maximizing output.
End Part 1
Price Discrimination
Price($)
MC
Consumer
Surplus
ATC
PM
Producer
Surplus
Deadweight
Loss
Demand
Marginal Revenue
0
QM
QUANTITY
Price Discrimination
I.
Conditions:
A. Monopoly power.
B. Market segregation: separate your customers into
groups based on how much they’re willing to pay.
C. No resale (customers cannot re-sell their purchase to
someone else at the higher price).
II. Results:
A. Firm can charge each customer as much as they are
willing to pay.
B. Increases profit and output.
C. Decreases consumer surplus (perfect price
discrimination completely eliminates consumer surplus).
Price Discrimination
Examples?
Price($)
MC
ATC
PM
PD
Demand
Marginal Revenue
0
QM
QD
QUANTITY
Perfect Price Discrimination
Examples?
Total Revenue is the whole shaded area.
Price($)
MC
ATC
PM
Demand
Marginal Revenue
0
QM
QD
QUANTITY