PURE MONOPOLY

CHAKRA B. KHADKA, PhD

Email: cfalkonet@hotmail.com

© CHAKRA .B.. KHADKA, PhD

 ASSUMPTIONS of Monopoly

§ Single seller
§ No close substitutes
§ Price maker
§ Blocked entry: Legal barriers to entry
§ Patents
§ Licenses
§ Ownership or control of essential resources
§ Pricing and other strategic barriers to entry
§ Non-price competition

© CHAKRA B. KHADKA, PhD 2

 Types of Monopoly

§ Regulated or natural monopolies

§ Electricity/Oil
§ Near monopolies
§ Western Union: Use Western Union to send money and
pay bills online, in person or by phone. You can also
purchase prepaid cards and personalized gift cards
§ Frisbee: A trademark for a plastic disk in a game
§ De Beers: De Beers and the various companies within
the De Beers Family of Companies are in the diamond,
diamond mining, diamond trading and industrial
diamond
§ Geographic monopolies: Climbing Mount Everest

© CHAKRA B. KHADKA, PhD 3

 Monopoly Demand
§ Assumptions:
§ Monopoly status is protected
§ No government regulation
§ Single-price monopolist
§ Face down-sloping demand
§ Entire market demand

© CHAKRA B. KHADKA, PhD 4

 Price and Marginal Revenue
Marginal revenue is less than price
• A monopolist is
selling 3 units at
Rs.142
Rs.142
• To sell 4, price must
be lowered to Rs.132 132
• All customers 122
must pay the same 112 Loss = Rs.30 D
price 102
• TR increases Rs.132 Gain = Rs.132
minus Rs.30 (3xRs.10) 92
• Rs.102 becomes a 82
point on the MR
curve MR

0 1 2 3 4 5 6

The Constructed Marginal Revenue Curve

Must Always Be Less Than the Price
© CHAKRA B. KHADKA, PhD 5
 Down-Sloping Demand

§ Marginal revenue < price

§ To increase sales, must lower price
§ Firm is a price maker
§ Choose P,Q combination

© CHAKRA B. KHADKA, PhD 6

 Profit Maximization

§ Output-price determination
§ Marginal revenue marginal cost
rule
§ Same cost definitions
§ No supply curve

© CHAKRA B. KHADKA, PhD 7

 Monopoly Revenue and Costs

Revenue Data Cost Data

(2) (3)
(1) Price Total (4) (5) (6) (7) (8)
Quantity (Average Revenue Marginal Average Total Cost Marginal Profit (+)
Of Output Revenue) (1) X (2) Revenue Total Cost (1) X (5) Cost or Loss (-)

0 Rs.172 Rs.0 ] Rs.100 ] Rs.90 Rs.-100

Rs.162
1 162 162 ] Rs.190.00 190 ] 80 -28
142
2 152 304 ] 135.00 270 ] 70 +34
122
3 142 426 ] 113.33 340 ] 60 +86
102
4 132 528 ] 100.00 400 ] 70 +128
82
5 122 610 ] 94.00 470 ] 80 +140
62
6 112 672 ] 91.67 550 ] 90 +122
42
7 102 714 ] 91.43 640 ] 110 +74
22
8 92 736 ] 93.75 750 ] 130 -14
2
9 82 738 ] 97.78 880 ] 150 -142
-18
10 72 720 103.00 1030 -310

© CHAKRA B. KHADKA, PhD 8

 Monopoly Revenue and Costs
Demand and Marginal-Revenue Curves
Rs.200
Elastic Inelastic

150
Price
100

50
D
MR
0 2 4 6 8 10 12 14 16 18
Total-Revenue Curve
Rs.750
Total Revenue

500

250
TR

0 2 4 6 8 10 12 14 16 18
© CHAKRA B. KHADKA, PhD 9
 Profit Maximization
Rs.200

Price, Costs, and Revenue 175

MC
150
Pm=Rs.122
125
Economic
Profit ATC
100

75
A=Rs.94 D
50
MR=MC

25
MR

0 1 2 3 4 5 6 7 8 9 10
Quantity
© CHAKRA B. KHADKA, PhD 10
 Misconceptions

§ Not the highest price

§ Total, not unit profit
§ Possibility of losses

© CHAKRA B. KHADKA, PhD 11

 Loss Minimization

Price, Costs, and Revenue

MC

ATC
A Loss
Pm
AVC

V
D

MR=MC

MR

0 Qm
Quantity
© CHAKRA B. KHADKA, PhD 12
 Economic Effects

§ Pure competition is efficient

§ Productive efficiency
§ Allocative efficiency
§ CS+PS (consumer surplus + producer surplus)
maximized
§ Monopoly is inefficient
§ Charge P>MC
§ Deadweight (burden) loss: The costs to society
created by an inefficiency in the market.

© CHAKRA B. KHADKA, PhD 13

 Policy Options

§ Use antitrust laws

§ Divide the firm
§ Natural monopoly
§ Regulate price
§ Ignore
§ Unstable in long run
© CHAKRA B. KHADKA, PhD 14
 Price Discrimination

§ Three forms
§ Charge each customer max
willingness to pay
§ Charge one price for first unit and a
lower price for subsequent units
§ Charge different customers different
prices

© CHAKRA B. KHADKA, PhD 15

 Price Discrimination

§ Conditions
§ Monopoly power
§ Market segregation
§ No resale
§ Examples
§ Airfares
§ Electric utilities
© CHAKRA B. KHADKA, PhD 16
 Regulated Monopoly

§ Natural monopolies
§ Rate regulation
§ Socially optimum price
§ P = MC
§ Fair return price
P = ATC
© CHAKRA B. KHADKA, PhD 17
 Regulated Monopoly
Dilemma of Regulation
Monopoly
Price
Price and Costs (Dollars)

Pm
Fair-Return
Price
Socially
f Optimal
Pf a Price
ATC

Pr
r MC

MR D
b
0 Qm Qf Qr
Quantity

© CHAKRA B. KHADKA, PhD 18