Chapter 13
Pure Monopoly
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Objectives
• Characteristics of pure
monopoly
• Revenue structure of monopoly
• Profit-maximizing output and
price
• Economic effects of monopoly
• Regulating monopolies- Policy
dilemmas
10-2
Characteristics of Monopoly
• Single seller – a sole producer
• No close substitutes – unique
product
• Price maker – control over price
• Entry is Blocked– strong
barriers to entry
• Non-price competition – mostly
10-3
Examples of Monopoly
–Utilities- electricity, telephone,
water, etc.
• Near monopolies
–Intel
–De Beers (but no longer)
10-4
Barriers to Entry
• Barriers to Entry: factors that keep
firms from entering an industry.
• Legal Barriers: Patents and
Licenses
• Financial
• Technological
• Ownership of Essential
Resources
• Economies of Scale
10-5
Average total cost
Economies of Scale
$20
15
0
LO1
ATC
10
50
100
Quantity
200
Monopoly Demand
• Assumptions:
–Monopoly status is secure
–No government regulation
–Single-price monopolist
• Face down-sloping demandmonopolist’s demand is the
market demand
–In order to sell additional unit,
10-7
Monopoly Demand
Revenue and Cost Data of a Pure Monopolist
Revenue Data
(1)
Quantity
of Output
LO1
Cost Data
(2)
Price
(Average
Revenue)
(3)
Total
Revenue
(1) X (2)
0
$ 172
$0
1
162
162
2
152
304
142
3
142
426
4
132
5
(4)
Marginal
Revenue
(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
528
102
100.00
400
60
+128
122
610
82
94.00
470
70
+140
6
112
672
62
91.67
550
80
+122
7
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
Down-Sloping Demand
• Marginal revenue < price
–To increase sales, must lower price
• Firm is a price maker
–Choose P,Q combination
• Operate in the elastic region
–Marginal revenue > 0
–Total-revenue test (recall)
10-9
Monopoly Revenue and Costs
$200
Demand and Marginal-Revenue Curves
Elastic
Inelastic
Price
150
100
50
D
MR
0
2
4
Total Revenue
$750
6
8
10
12
Total-Revenue Curve
14
16
18
500
250
0
TR
2
4
6
8
10
12
14
16
18
10-10
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 (loss minimising) output by finding
where MR=MC.
Step 2
Determine the profit-maximizing (loss minimising) 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 (loss) by using one
of two methods:
Method 1. Find profit (loss) per unit by subtracting the average total
cost of the output from the price. Then multiply the difference by the
output to determine economic profit (loss).
Method 2. Find total cost by multiplying the average total cost of the
profit-maximizing (loss minimising) output by that output. Find total
revenue by multiplying the output by the price. Then subtract total
cost from total revenue to determine the economic profit (loss).
LO2
Monopoly Revenue and Costs
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?
10-12
Profit Maximization
Price, Costs, and Revenue
$200
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
7
8
9
10
Quantity
10-13
Misconceptions
• Not the highest price
• Total, not unit, profit
• Possibility of losses
10-14
Price, Costs, and Revenue
Loss Minimization
MC
A
Pm
ATC
Loss
AVC
V
D
MR=MC
MR
0
Qm
Quantity
10-15
Economic Effects
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 is inefficient
10-16
Economic Effects
• Pure competition is efficient
–Allocative efficiency- P=MC
–Productive efficiency- P=min
ATC
• Monopoly is inefficient
–Charge P>MC, ex-inefficiency
• Price under monopoly is
higher than pure competition
• Income transfer
10-17
Average total costs
X-Inefficiency
ATC1
X'
ATCx'
Average
total cost
ATC2
0
LO3
X
ATCx
Q1
Quantity
Q2
Price Discrimination
• Several types
– Charge each customer max
willingness to pay- perfect price
discrimination
– Charge different group of
customers different prices
– Charge one price for first unit
and a lower/higher price for
subsequent units
– Member subscription for lower
prices
10-19
Price Discrimination
• Conditions
– Monopoly power
– Market segregation
– No resale
• Examples
– Airfares
– Electric utilities
– Club houses & golf courses
10-20
LO3
How to deal with the impact of
monopoly?
• Antitrust/Competition laws
• Break up the firm
• Regulate it
• Government determines price and
quantity
• Ignore it
• Let time and markets get rid of
monopoly
• Natural Monopoly?
Regulated Monopoly
• Natural monopolies
• Good to consumers?
• Technical definition- ATC
continues to fall when it
cuts the market demand
curve
• Regulate to improve
10-22
Regulated Monopoly
Dilemma of Regulation
Price and Costs (Dollars)
Monopoly
Price
Pm
Fair-Return
Price
f
Pf a
Socially
Optimal
Price
ATC
Pr
r
D
MR
0
MC
b
Qm
Qf
Qr
Quantity
10-23
Regulated Monopoly
• Socially optimum price
P = MC – allocatively
efficient, lowest price and
highest quantity for society
But the firm will incur
economic losses
Financial burden in the form
of government subsidies
10-24