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1-1
Pure Monopoly
Chapter 8
McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved
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
8-2
Examples of Monopoly
• Public utility companies• Natural gas• Electric• Water
• Near monopolies• Intel• Wham-O
• Professional sports teams
8-3
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 8-4
Monopoly Demand
• The pure monopolist is the industry
• The demand curve is the market demand curve
• Downsloping demand curve
• Marginal revenue is less than price
LO1 8-5
Revenue and Cost Data of a Pure Monopolist
Revenue Data Cost 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 $ -100
1 162 162 $ 162 $ 190.00 190 $ 90 -28
2 152 304 142 135.00 270 80 +34
3 142 426 122 113.33 340 70 +86
4 132 528 102 100.00 400 60 +128
5 122 610 82 94.00 470 70 +140
6 112 672 62 91.67 550 80 +122
7 102 714 42 91.43 640 90 +74
8 92 736 22 93.75 750 110 -14
9 82 738 2 97.78 880 130 -142
10 72 720 -18 103.00 1030 150 -310
Monopoly Demand
LO2 8-6
Monopoly Demand
LO2
D
Gain = $132
Loss = $30
• All customers must pay the same price
8-7
Output and Price Determination
LO2
2 4 6 8 10 12 14 16 18
$200
150
100
50
0
Quantity
Pri
ce
D
MR
8-8
Monopoly Demand
• Marginal revenue < Price
• Monopolist is a price maker
• Monopolist sets prices in elastic region of demand curve
8-9
$200
175
150
125
25
100
75
50Pri
ce,
Co
sts,
an
d R
even
ue
1 2 3 4 5 6 7 8 9 10Quantity
Output and Price Determination
0
D
MR
ATC
MC
MR=MCA=$94
EconomicProfit
Pm=$122
8-10
Misconceptions of Monopoly Pricing
• Not highest price
• Total profit
• Possibility of losses
8-11
Economic Effects of Monopoly
LO3
(a)
Purely competitive market
(b)
Pure monopoly
D D
S=MC MC
P=MC=Minimum
ATC
MR
Pc
Qc
Pc
Pm
QcQm
Pure competition is efficientMonopoly is inefficient
a
b
cd
8-12
Economic Effects of Monopoly
• Income transfer
• Cost complications
• Economies of scale
• X-inefficiency
• Rent-seeking expenditures
• Technological advance
8-13
Price Discrimination
• Price discrimination • Charging different buyers different
prices • Price differences are not based on cost
differences• Conditions for success:
• Monopoly power• Market segregation• No resale
LO4 8-14
Examples of Price Discrimination
• Business travel• Electric utilities• Movie theaters• Golf courses• Railroad companies• Coupons• International trade
LO4 8-15
Graphical Analysis
LO4
MC = ATC MC = ATC
Qb
Qs
Ps
Pb
P P
MRbMRs
Db
Ds
(a) Small businesses (b) Students
Economic profit
Economic profit
8-16
Monopoly and Antitrust Policy
• Antitrust laws• Break up the firm
• Regulate it• Government determines price and
quantity• Ignore it
• Let time and markets get rid of monopoly
LO5 8-17
Global Perspective
Competition from Foreign Multinational Corporations
8-18