Chapter 12

Pure Monopoly

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12-2

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

12-3

Examples of Monopoly

• Public utility companies• Natural gas• Electric• Cable television

• Near monopolies• Intel• Wham-O

• Professional sports teamsLO1

12-4

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

12-5

Economies of Scale

10

15

$20

50 100 200

ATC

LO2

12-6

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

12-7

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 (+) or

Loss (-)

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

12-8

Monopoly Demand

D

Gain = $132

Loss = $30

LO3

12-9

Monopoly Demand

• Marginal revenue will be less than price• Monopolist is a price maker• Monopolist sets price in the elastic region of

the demand curve

LO3

12-10

Demand, Marginal Revenue, and Total Revenue

Elastic Inelastic

Total-revenue curve

DMR

TR

LO3

12-11

Output and Price Determination

LO2

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 2Determine 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 3Determine 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).

12-12

$200

175

150

125

25

100

75

50Pric

e, c

osts

, and

reve

nue

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

LO4

12-13

Misconceptions Concerning Monopoly Pricing

• Not the highest price• Total profit• Possibility of losses

LO4

12-14

Misconceptions of Monopoly Pricing

0

D

MR

ATC

MC

MR=MC

Loss

AVCPm

Qm

V

A

LO4

12-15

Economic Effects of Monopoly

(a)Purely competitive market

(b)Pure monopoly

D D

S=MC MC

P=MC=Minimum

ATC

MR

Pc

Qc

Pc

Pm

QcQm

a

b

cd

LO5

12-16

Economic Effects of Monopoly

• Income transfer• Cost complications• Economies of scale• Simultaneous consumption• Network effects• X-inefficiency• Rent-seeking behavior• Technological advance

LO5

12-17

X-Inefficiency

ATC2

ATC1

ATCx

Q1 Q2

Averagetotal cost

X

X'ATCx'

LO5

12-18

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

12-19

Global Perspective

LO3

12-20

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

12-21

Examples of Price Discrimination

• Business travel• Electric utilities• Movie theaters• Golf courses• Railroad companies• Coupons• International trade

LO6

12-22

Graphical Analysis

MC = ATC MC = ATC

Qb

Qs

Ps

Pb

P P

MRbMRs

Db

Ds

(a) Small businesses (b) Students

Economic profit Economic

profit

LO6

12-23

Regulated Monopoly

• Natural monopolies• Socially optimal price• Set price equal to marginal cost

• Fair return price• Set price equal to average total cost

LO7

12-24

Regulated Monopoly

Monopolyprice

Fair-returnprice

Sociallyoptimal

price

Pr

Dr

f

b

aPf

Pm

Qm Qf Qr

MR

MC

ATC

LO7

12-25

Monopoly Power in the Internet Age

• Google dominates search• Facebook dominates social media• Amazon dominates as an online retailer• Barriers of entry • Network effects of being large attract more

users• Economies of scale