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