Pure Monopoly
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Transcript of Pure Monopoly
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Chapter 12Pure Monopoly
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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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
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12-3
Examples of Monopoly
• Public utility companies• Natural gas• Electric• Cable television
• Near monopolies• Intel• Wham-O
• Professional sports teamsLO1
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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
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12-5
Economies of Scale
10
15
$20
50 100 200
ATC
LO2
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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
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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
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12-8
Monopoly Demand
D
Gain = $132
Loss = $30
LO3
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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
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12-10
Demand, Marginal Revenue, and Total Revenue
Elastic Inelastic
Total-revenue curve
DMR
TR
LO3
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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).
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12-12
$200
175
150
125
25
100
75
50Pric
e, c
osts
, and
rev
enue
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
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12-13
Misconceptions Concerning Monopoly Pricing
• Not the highest price• Total profit• Possibility of losses
LO4
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12-14
Misconceptions of Monopoly Pricing
0
D
MR
ATC
MC
MR=MC
Loss
AVCPm
Qm
V
A
LO4
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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
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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
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12-17
X-Inefficiency
ATC2
ATC1
ATCx
Q1 Q2
Averagetotal cost
X
X'ATCx'
LO5
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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
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12-19
Global Perspective
LO3
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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
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12-21
Examples of Price Discrimination
• Business travel• Electric utilities• Movie theaters• Golf courses• Railroad companies• Coupons• International trade
LO6
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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
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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
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12-24
Regulated Monopoly
Monopolyprice
Fair-returnprice
Sociallyoptimal
price
Pr
Dr
f
b
aPf
Pm
Qm Qf Qr
MR
MC
ATC
LO7
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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