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Chapter 12
Pure Monopoly

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
 Chapter Contents
An Introduction to Pure Monopoly
Barriers to Entry
Monopoly Demand
Output and Price Determination
Economic Effects of Monopoly
Price Discrimination
Regulated Monopoly

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 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.
Non-price competition: mostly PR but can
engage in advertising to increase demand.

LO 12.1
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 Examples of Monopoly
Public utility companies:
• Natural gas.
• Electric.
• Cable television.

Near monopolies
• Intel.
• Android.

Professional sports teams

LO 12.1
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 Barriers to Entry
Barriers to entry are factors that prevent firms
from entering the industry:
• Economies of scale.
• Legal barriers to entry like patents and
licenses.
• Ownership or control of essential resources.
• Pricing and other strategic barriers.

LO 12.2
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 Economies of Scale: The Natural
Monopoly Case

LO 12.2
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 Monopoly Demand Overview
The pure monopolist is the industry.
Monopolist demand curve is the market demand
curve.
Demand curve is downward sloping.
Marginal revenue is less than price.

LO 12.3
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 Monopoly Demand Schedule
Revenue and Cost Data of a Pure Monopolist

LO 12.3
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 Price and Marginal Revenue in Pure
Monopoly

LO 12.3
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 Monopoly Demand and Price
Marginal revenue will be less than price.
Monopolist is a price maker.
Monopolist sets price in the elastic region of the
demand curve.

LO 12.3
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 Demand, Marginal Revenue, and Total
Revenue for a Pure Monopolist

LO 12.3 Access the text alternative for slide images.

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 Profit Maximization by a Pure Monopolist

LO 12.4 Access the text alternative for slide images.

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 Output and Price Determination Steps
Steps for Graphically Determining the Profit-Maximizing Output, Profit-
Maximizing Price, and Economic Profit (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).

LO 12.4
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 Misconceptions of Monopoly Pricing

Not the highest price

Total, not unit, profit
Possibility of losses

LO 12.4
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 The Loss-Minimizing Position of a Pure
Monopolist

LO 12.4
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 Inefficiency of Pure Monopoly Relative to
a Purely Competitive Industry

LO 12.5 Access the text alternative for slide images.

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 Economic Effects of Monopoly
Income transfer
Cost complications:
• Economies of scale.
• Simultaneous consumption.
• Network effects.
• X-inefficiency.
• Rent-seeking behavior.
• Technological advance.
LO 12.5
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 Assessment and Policy Options
Antitrust laws: Break up the firm.
Regulate it: Government determines price and
quantity.
Ignore it: Let time and markets get rid of
monopoly.

LO 12.5
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 Global Perspective 12.1
COMPETITION FROM FOREIGN MULTINATIONAL CORPORATIONS

LO 12.5 Access the text alternative for slide images.

© McGraw Hill Source: Fortune Global 500. Fortune Media IP Limited, 2019. 20
 A purely monopolistic firm
A. has no entry barriers.
B. faces a downsloping demand curve.
C. produces a product or service for
which there are many close
substitutes.
D. earns only a normal profit in the
long run.

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 Pure monopolists may obtain economic
profits in the long run because:

A. of advertising.
B. marginal revenue is constant as
sales increase.
C. of barriers to entry.
D. of rising average fixed costs.

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 When a firm is on the inelastic
segment of its demand curve, it
can:
A. increase total revenue by reducing
price.
B. decrease total costs by decreasing price.
C. increase profits by increasing price.
D. increase total revenue by more than the
increase in total cost by increasing
price.
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 In the accompanying diagram, if price is
reduced from P1 to P2, total revenue will

A. increase by A −C.
B. increase by C −A.
C. decrease by A −C.
D. decrease by C −A.

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 A monopolistic firm has a sales schedule
such that it can sell 10 prefabricated
garages per week at $10,000 each, but if it
restricts its output to 9 per week it can sell
these at $11,000 each. The marginal
revenue of the 10th unit of sales per week is

A. −$1,000.
B. $9,000.
C. $1,000.
D. $10,000.

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 Price Discrimination
Price discrimination:
• Charging different buyers different prices.
• Different prices are not based on cost
differences.
Conditions for success:
• Monopoly power.
• Market segregation.
• No resale.
LO 12.6
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 Examples of Price Discrimination
Business travel
Movie theaters
Golf courses
Railroad companies
Coupons
International trade

LO 12.6
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 Price Discrimination Applied to Different Groups of Buyers

LO 12.6 Access the text alternative for slide images.

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 Regulated Monopoly
Natural monopolies.
Socially optimal price: Set price equal to
marginal cost.
Fair return price:
• Set price equal to average total cost.
• Dilemma of regulation.

LO 12.7
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 Rate Regulation of a Natural Monopoly

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 Critically evaluate and explain each statement

a. Because they can control product price, monopolists can guarantee

profitable production by simply charging the highest price consumers
will pay.
b. The pure monopolist seeks the output that yield the greatest per-unit
profit.
c. An excess of price over marginal cost is the market’s way of
signaling the need for more production of a good.
d. The more profitable a firm, the greater its monopoly power.
e. The monopolist has a pricing policy; the competitive producer does
not.
f. With respect to resource allocation, the interests of the seller and of
society coincide in a purely competitive market but conflict in a
monopolized market.
Present your answers next class. Use slides and tables if necessary.
This will count as class participation.
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 Last Word: Personalized Pricing
“Big Data” available to Internet retailers.
Ability to set a price according to consumer’s
perceived ability to pay.
Based on your online buying habits,
backgrounds, and preferences.
Low price for those with elastic demand.
Higher price for those with inelastic demand.
Personalized pricing strategy can fail when
consumers comparison shop.

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© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.