Pure Monopoly

Pure Monopoly
The Seller’s Delight
The Opposite End of the Spectrum
Pure Competition
Monopolistic Competition
When do we deal with Monopolies?
• A Monopoly is from the Greek monos, which
means single or alone.
• There is a sole firm, alone to reap all of the
profits and provide the product or service.
• Often industries start with a monopoly. Such
as Microsoft (Software), Bell (Telecom.), Bayer
(Aspirin and other drugs).
Pure Monopoly Exists When…
• Single Seller: Only game in town. The firm and
the industry can often be synonymous.
• No Close Substitutes: unique product that you
would have to do without if you didn’t buy it.
• Price-Maker: If you control the supply, you can
manipulate price. Demand curve still exists.
• Blocked Entry: Economic, tech., legal, or
geographic. Barriers prevent competition.
The Barriers to Entry:
Maintaining a Monopoly
• If there are profits to be had, new businesses
would enter the industry unless they are being
prevented in some way.
1) Economies of Scale: Declining ATC with
increased firm size. For some large firms,
Long-Run ATC is too low for most to compete.
(Procter & Gamble NYSE:PG)
The Barriers to Entry:
Maintaining a Monopoly
2) Legal Barriers:
Patents The exclusive right to an invention,
generally 17 years. (Johnson & Johnson: JNJ)
Licenses The government can legally restrict
others from operating or competing without a
license to do so. (Bell Canada Enterprises: BCE)
The Barriers to Entry:
Maintaining a Monopoly
3) Ownership of Essential Resources: A company
might own the resource required to make the
product. (De Beers Diamond Company)
4) Pricing or Strategic Barrier: Heavy pricing
discounts can drive competition out of business,
or heavy advertising can effectively eliminate
other brands. (Coca-Cola: KO or Pepsi: PEP)
Monopoly and Demand
• In Pure Competition, demand is perfectly
elastic because the seller has no influence on
the overall market.
• The Monopolist is the Industry, they are the
sole supplier. So they must face a downward
sloping demand curve.
• Therefore, MR is not Demand.
Marginal Revenue < Price
• A Monopolist must reduce its price to increase
• Each Marginal Unit sold increases revenue by
an amount equal to its own price, but less the
sum of the price cuts needed on all previous
• This means that Marginal Revenue is < Price or
(Average Revenue) and below Demand. 10-3
The Monopolist is a Price Maker
• In deciding what output to produce, the
Monopolist is deciding what price to charge.
• This is true because the Monopolist is the
industry and, therefore, determines Supply.
• In Pure Competition, what happens when the
business tries to raise the price by reducing its
The Monopolist Sets Prices in the
Elastic Region of Demand
• When demand is elastic, a decline in price
increases TR.
• When demand is inelastic, a decline in price
reduces TR.
• A profit maximizing firm wants to avoid
inelastic price reductions. Less Total Revenue
and Higher Total Costs means Less Profit.