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Pure Monopoly
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Introduction to Pure Monopoly
• 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
LO1 12-2
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Examples of Monopoly
• Public utility companies
• Natural gas
• Electric
• Cable television
• Near monopolies
• Intel
• Wham-O
• Professional sports teams
LO1 12-3
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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
LO2 12-4
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Economies of Scale
$20
Average total cost
15
ATC
10
0 50 100 200
Quantity
LO2 12-5
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Monopoly Demand
• The pure monopolist is the industry
• Monopolist demand curve is the market
demand curve
• Demand curve is downsloping
• Marginal revenue is less than price
LO3 12-6
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Monopoly Demand Schedule
Revenue and Cost Data of a Pure Monopolist
Revenue Data Cost Data
(1) Quantity (2) (3) (4) Marginal (5) (6) (7) (8)
of Output Price Total Revenue Average Total Cost Marginal Profit (+) or
(Average Revenue Total Cost (1) × (5) Cost Loss (-)
Revenue) (1) × (2)
$142
132
122
112 Loss = $30 D
102
Gain = $132
92
82
0 1 2 3 4 5 6
LO3 12-8
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Monopoly Demand Continued
• Marginal revenue will be less than price
• Monopolist is a price maker
• Monopolist sets price in the elastic region
of the demand curve
LO3 12-9
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Demand, Marginal Revenue,
and Total Revenue
$200 Elastic Inelastic
150
Price
100
50
D
MR
0 2 4 6 8 10 12 14 16 18
Total-revenue curve
$750
Total revenue
500
250
TR
0 2 4 6 8 10 12 14 16 18
LO3 12-10
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Output and Price Determination
$200
175
Pm=$122 MC
150
Price, costs, and revenue
125
Economic
profit ATC
100
75 D
A=$94
MR=MC
50
25
MR
0
1 2 3 4 5 6 7 8 9 10
Quantity
LO4 12-11
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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.
Determine the profit-maximizing price by extending a vertical line upward
Step 2 from the output determined in step 1 to the pure monopolist’s demand
curve.
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).
LO4 12-12
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Misconceptions Concerning
Monopoly Pricing
• Not the highest price
• Total profit
• Possibility of losses
LO4 12-13
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Misconceptions of Monopoly
Pricing
MC
Price, costs, and revenue
ATC
A Loss
Pm
AVC
V
D
MR=MC
MR
0 Qm
Quantity
LO4 12-14
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Inefficiency of Pure Monopoly
S = MC MC
Pm b
P = MC = d
Pc Pc c
Minimum
ATC a
D D
MR
Qc Qm Qc
(a) (b)
Purely competitive market Pure monopoly
LO5 12-15
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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
LO5 12-16
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X-Inefficiency
X
ATCx
Average total costs
ATC1
X'
ATCx' Average
ATC2 total cost
0 Q1 Q2
Quantity
LO5 12-17
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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
LO5 12-18
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Global Perspective
LO5 12-19
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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
LO6 12-20
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Examples of Price
Discrimination
• Business travel
• Electric utilities
• Movie theaters
• Golf courses
• Railroad companies
• Coupons
• International trade
LO6 12-21
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Graphical Analysis
P P
Economic
profit Economic
Pb
profit
Ps
MC = ATC MC = ATC
Qs Ds
Qb
MRb Db MRs
LO6 12-22
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Regulated Monopoly
• Natural monopolies
• Socially optimal price
• Set price equal to marginal cost
• Fair return price
• Set price equal to average total cost
LO7 12-23
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Regulated Monopoly
Continued
Monopoly
price
Pm
Price and costs (dollars)
Fair-return
price
Socially
a f optimal
Pf price
ATC
Pr r MC
MR D
b
0
Qm Qf Qr
Quantity
LO7 12-24
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Personalized Pricing on the
Internet
• “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
12-25
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.