13
Pure Monopoly
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Four Market Models
Characteristics of the Four Basic Market Models
Characteristic
Pure
Competition
Monopolistic
Competition
Oligopoly
Monopoly
Number of firms
A very large
number
Many
Few
One
Type of product
Standardized
Differentiated
Standardized or
differentiated
Unique; no
close subs.
Control over
price
None
Some, but within rather
narrow limits
Limited by mutual
inter-dependence;
considerable with
collusion
Considerable
Conditions of
entry
Very easy, no
obstacles
Relatively easy
Significant
obstacles
Blocked
Nonprice
competition
None
Considerable emphasis
on advertising, brand
names, trademarks
Typically a great
deal, particularly
with product
differentiation
Mostly public
relation
advertising
Examples
Agriculture
Retail trade, dresses,
shoes
Steel, auto, farm
implements
Local utilities
LO1
An Introduction to Pure Monopoly
•
•
•
•
•
Single seller – a sole producer
No close substitutes – unique product
Price maker – control over price
Blocked entry – strong barriers to entry block
potential competition
Non-price competition – mostly PR or advertising
the product
Public utility
companies
• Natural Gas
• Electric
• Water
LO1
Near
monopolies
• Intel
• Wham-O
Professional
sports teams
Barriers to Entry
• Barrier to entry: a factor that keeps
firms from entering an industry
• Economies of scale
• Legal barriers: patents and licenses
• Ownership of essential resources
• Pricing
LO1
Monopoly Demand
• The pure monopolist is the industry
• Demand curve is the market demand
•
LO1
curve
• Downsloping demand curve
Marginal revenue is less than price
Monopoly Demand
• Marginal revenue < price
• Monopolist is a price maker
• Monopolist sets prices in elastic
region of demand curve
LO2
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
Output and Price Determination
Price, Costs, and Revenue
$200
175
Pm=$122
MC
150
125
100
75
Economic
Profit
ATC
D
A=$94
MR=MC
50
25
0
LO2
MR
1
2
3
4
5
6
Quantity
7
8
9
10
Misconceptions of Monopoly Pricing
• Not highest price
• Total profit
• Possibility of losses
LO2
Price, Costs, and Revenue
Misconceptions of Monopoly Pricing
MC
A
Pm
ATC
Loss
AVC
V
D
MR=MC
MR
0
Qm
Quantity
LO2
Economic Effects of Monopoly
Pure competition is efficient
Monopoly is inefficient
S=MC
MC
P=MC=
Minimum
ATC
Pc
Pm
Pc
b
d
c
a
D
D
MR
Qc
(a)
Purely Competitive Market
LO3
Qm Qc
(b)
Pure Monopoly
Economic Effects of Monopoly
• Income transfer
• Cost complications
• Economies of scale
• X-Inefficiency
• Rent seeking expenditures
• Technological advance
LO3
Average total costs
X-Inefficiency
ATC1
X'
ATCx'
Average
Total Cost
ATC2
0
LO3
X
ATCx
Q1
Quantity
Q2
Price Discrimination
• Price discrimination
Price Discrimination
• Charging different buyers different
prices
• Price differences are not based on
cost differences
• Examples: business travel, electric
utilities, movie theaters, golf
courses, railroad companies,
coupons, international trade
LO4
Price Discrimination
• Conditions for success:
• Monopoly power
• Market segregation
• No resale
LO4
Regulated Monopoly
• Natural monopolies
• Socially optimal price
• Set price = marginal cost
• Fair return price
• Set price = ATC
LO5
Price and Costs (Dollars)
Regulated Monopoly
Monopoly
Price
Pm
Pf
Fair-Return
Price
a
f
Pr
r
MR
0
LO5
Socially
Optimal
Price
Qm
b
Qf
Quantity
Qr
ATC
MC
D
