PURE MONOPOLY
Pure Monopoly
● is an industry with a single firm that produces a product for which there are no
close substitutes and in which significant barriers to entry prevent other firms
from entering the industry to compete for profits.
Characteristics of Pure Monopoly
●
●
●
●
●
Single seller
No close substitutes.
The firm is a “price maker”.
Significant barriers to entry exist.
Non-price competition
Examples of pure monopolies and “near monopolies”:
1. Public utilities
2. Professional sports leagues
3. First Data Resources (Western Union), and the DeBeers diamond syndicate
are examples of “near” monopolies.
4. Monopolies may be geographic.
Barriers to Entry
1. Legal barriers
● Patents
● Licenses/Permits
● Trade Barriers
● Standards and regulation
2. Technical barriers
● High Startup Costs
● Sunk Costs
● Economies of Scale
3. Strategic Barriers to Entry
● Predatory Pricing
● Heavy Advertising
4. Brand loyalty
ADVANTAGES OF PURE MONOPOLY
1.
2.
3.
4.
Research and development
Economies of scale
International competitiveness
Monopolies can be successful firms
DISADVANTAGES OF PURE MONOPOLY
1. Higher prices than in competitive markets
2. A decline in consumer surplus.
3. Monopolies have fewer incentives to be efficient
4. Possible diseconomies of scale.
MONOPOLY REVENUES AND COSTS
Revenue Data
Cost Data
Quantity Price
TR
(Average Revenue)
MR ATC
TC
MC Profit (+)
Loss (-)
0
172
0
-
100
-
-100
1
162
162 162 190
190
90
-28
2
152
304 142 135
270
80
+34
3
142
426 122 113.33 340
70
+86
4
132
528 102 100
400
60
+128
5
122
610 82
94
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
93.73
750
110 -14
9
82
738 2
97.78
880
130 -142
10
72
720 -18
193
1030 150 -310
-
REVENUE CURVE FOR A PURE MONOPOLIST
● The monopolist sets prices in the elastic region of demand.
● A monopolist will NEVER produce in the inelastic range of its demand!
● The pure monopolist has no supply curve. There is no unique relationship
between price and quantity supplied for a monopolist.
MAXIMIZING PROFIT
● To maximize their profit, they need to find the point where their marginal
revenue is equal to their marginal cost (MR=MC). Or, compare TR to TC at
every level of production and pick the level that gives the most profit.
● Faces a downward-sloping market demand curve. As a result MR < P.
The Inefficiency of Monopoly
1. The Allocative Inefficiency of Monopoly
The allocative efficiency is at an output level where the Price equals the
Marginal Cost (MC) of production. The rule of profit maximization in a world of
perfect competition was for each firm to produce the quantity of output where P
= MC. However, in the case of monopoly, at the profit-maximizing level of
output, price is always greater than marginal cost.
2. Productive Inefficiency
In case of monopoly, the monopoly firm is always productively inefficient. This
happens because a monopolist does not produce at minimum average cost. In
monopoly, the production is made at a level which is less than minimum
average cost due to which less quantity is produced and higher price is charged.
Price Discrimination
● One benefit a firm with monopoly power may enjoy is the ability to charge
different prices to different consumers for the same product. This is known as
price discrimination.
Ways of Price Discriminating
1. Charge each person his or her max willing to pay price.
2. Charge more for the first set of the product, then less for each additional product
bought by the same consumer.
3. Charge different customers different price based on factors such as race, gender,
age, abilities etc.
Price discrimination Is possible when the following conditions are realized:
1. Monopoly Power
2. Market Segregation
3. No Resale Little or No Cost Difference
Examples of Price Discrimination
1. Airlines
2. Electric utilities
3. Long‐ distance phone service
4. Movie theaters and golf courses
5. International trade
Misconceptions about monopoly prices
● Monopolist cannot charge the highest price it can get.
● Total, not unit, profits is the goal of the monopolist.
● Although Monopolists likely make greater profits than they would in pure
competition, they are not guaranteed a profit. They are not immune to changes
in tastes, economic effects, escalating resource prices, etc.
● Faced with continuing loses, monopolists will choose to do something else with
their resources.
SUMMARY OF FOUR MARKET MODELS