Chapter 8: Pure Monopoly
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 Nonprice competition—mostly PR or advertising the product
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Pure MonopolyChapter 8McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reservedAn Introduction to Pure MonopolySingle seller—a sole producerNo close substitutes—unique productPrice maker—control over priceBlocked entry—strong barriers to entry block potential competitionNonprice competition—mostly PR or advertising the product8-*Examples of MonopolyPublic utility companiesNatural gasElectricWaterNear monopoliesIntelWham-OProfessional sports teams8-*Barriers to EntryBarrier to entry: a factor that keeps firms from entering an industryEconomies of scaleLegal barriers: patents and licensesOwnership of essential resourcesPricingLO18-*Monopoly DemandThe pure monopolist is the industryThe demand curve is the market demand curveDownsloping demand curveMarginal revenue is less than priceLO18-*Revenue and Cost Data of a Pure MonopolistRevenue DataCost Data(1) Quantity of Output(2) Price (Average Revenue)(3)Total Revenue(1) X (2)(4) Marginal Revenue(5)Average Total Cost(6)Total Cost(1) X (5)(7)Marginal Cost(8)Profit (+) orLoss (-)0$ 172$0$ 100$ -1001162162$ 162$ 190.00190$ 90-282152304142135.0027080+343142426122113.3334070+864132528102100.0040060+128512261082 94.0047070+140611267262 91.6755080+122710271442 91.4364090+7489273622 93.75750110-149827382 97.78880130-1421072720-18103.001030150-310Monopoly DemandLO28-*Monopoly DemandLO2DGain = $132Loss = $30 All customers must pay the same price8-*Output and Price DeterminationLO224681012141618$200150100500QuantityPriceDMR8-*Monopoly DemandMarginal revenue < PriceMonopolist is a price makerMonopolist sets prices in elastic region of demand curve8-*$200175150125251007550Price, Costs, and Revenue12345678910QuantityOutput and Price Determination0DMRATCMCMR=MCA=$94EconomicProfitPm=$1228-*Misconceptions of Monopoly PricingNot highest priceTotal profitPossibility of losses8-*Economic Effects of MonopolyLO3(a)Purely competitive market(b)Pure monopolyDDS=MCMCP=MC=MinimumATCMRPcQcPcPmQcQmPure competition is efficientMonopoly is inefficientabcd8-*Economic Effects of MonopolyIncome transferCost complicationsEconomies of scaleX-inefficiencyRent-seeking expendituresTechnological advance8-*Price DiscriminationPrice discrimination Charging different buyers different prices Price differences are not based on cost differencesConditions for success:Monopoly powerMarket segregationNo resaleLO48-*Examples of Price DiscriminationBusiness travelElectric utilitiesMovie theatersGolf coursesRailroad companiesCouponsInternational tradeLO48-*Graphical AnalysisLO4MC = ATCMC = ATCQb QsPsPb PPMRbMRsDbDs(a) Small businesses(b) StudentsEconomic profitEconomic profit8-*Monopoly and Antitrust PolicyAntitrust lawsBreak up the firmRegulate itGovernment determines price and quantityIgnore itLet time and markets get rid of monopolyLO58-*Global PerspectiveCompetition from Foreign Multinational Corporations8-*
