Pure Monopoly

1
Pure Monopoly
2
FOUR MARKET MODELS
Pure Monopoly

• Single Seller
• No Close Substitutes
• Price Maker
• Blocked Entry
• Nonprice Competition

3
MONOPOLY EXAMPLES

• Pure Monopoly
• Regulated Monopoly
• Near Monopolies
• Dual Objectives of the Study
• Monopoly as a Market Structure
• To Better Understand Other Market Structures

4
Near Monopolies

• Intel - 80 of central microprocessors in p.c.s.
• First Data Corp. (Western Union) - 80 of money
  order transfers.
• Brannock Device Company - 80 of shoe sizing
  devices.
• Wham-o - 90 of plastic throwing discs.
• De Beers - 63 of rough cut diamonds.

5
BARRIERS TO ENTRY

• Economies of Scale
• The Natural Monopoly Case
• Legal Barriers to Entry
• Patents
• Licenses
• Ownership or Control of Essential Resources
• Pricing and Other Strategic Barriers to Entry

6
THE NATURAL MONOPOLY CASE
20
15
ATC
Average Total Cost
10
If ATC declines over extended output, least-cost
production is realized only if there is one
producer - a natural monopoly
0
50
100
200
Quantity
7
MONOPOLY DEMAND

• 3 Basic Assumptions
• Monopoly Status is Secure
• No Governmental Regulation
• Firm Charges the Same Price for all Units Sold
• Market Demand Curve is the Firms Demand Curve

8
MONOPOLY DEMAND
P
As price decreases from 142 to 132...
but revenue will increase with
the additional unit sold
142
Loss 30
132
D
Gain 132
Q
1 2 3 4 5 6
9
MONOPOLY DEMAND
P
As price decreases from 142 to 132...
but revenue will increase with
the additional unit sold
142 132
Loss 30
D
Gain 132
Q
1 2 3 4 5 6
10
MONOPOLY REVENUES COSTS
Revenue Data
Cost Data
Quantity of Output
Price (Average Revenue)
Profit or loss -
Average Total Cost
Marginal Revenue
Total Revenue
Marginal Cost
Total Cost
-
x
0
172
0
- 100
100


11
MONOPOLY REVENUES COSTS
Revenue Data
Cost Data
Quantity of Output
Price (Average Revenue)
Profit or loss -
Average Total Cost
Marginal Revenue
Total Revenue
Marginal Cost
Total Cost
0
172
0
- 100
100
0 1
172 162
0 162
- 100 - 28
100 190
90
162
-
x


190.00
MC 190 100 90
MR 162 0 162
MR MC Loss Improvement from -100 to -28 Check
next unit of output!
12
MONOPOLY REVENUES COSTS
Revenue Data
Cost Data
Quantity of Output
Price (Average Revenue)
Profit or loss -
Average Total Cost
Marginal Revenue
Total Revenue
Marginal Cost
Total Cost
0 1 2 3 4 5 6 7 8 9 10
172 162 152 142 132 122 112 102 92 82 72
0 162 304 426 528 610 672 714 736 738 720
- 100 - 28 34 86 128 140 122 74 -
14 - 142 - 310
100 190 270 340 400 470 550 640 750 880 1030
90 80 70 60 70 80 90 110 130 150
162 142 122 102 82 62 42 22 2 - 18
190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.
73 97.78 103.00
13
MONOPOLY REVENUES COSTS
Revenue Data
Cost Data
Quantity of Output
Price (Average Revenue)
Profit or loss -
Average Total Cost
Marginal Revenue
Total Revenue
Marginal Cost
Total Cost
Can you see profit maximization?
0 1 2 3 4 5 6 7 8 9 10
172 162 152 142 132 122 112 102 92 82 72
0 162 304 426 528 610 672 714 736 738 720
- 100 - 28 34 86 128 140 122 74 -
14 - 142 - 310
100 190 270 340 400 470 550 640 750 880 1030
MR MC
90 80 70 60 70 80 90 110 130 150
162 142 122 102 82 62 42 22 2 - 18
190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.
73 97.78 103.00
14
MONOPOLY REVENUES COSTS
Revenue Data
Cost Data
Quantity of Output
Price (Average Revenue)
Profit or loss -
Average Total Cost
Marginal Revenue
Total Revenue
Marginal Cost
Total Cost
0 1 2 3 4 5 6 7 8 9 10
172 162 152 142 132 122 112 102 92 82 72
0 162 304 426 528 610 672 714 736 738 720
- 100 - 28 34 86 128 140 122 74 -
14 - 142 - 310
100 190 270 340 400 470 550 640 750 880 1030
90 80 70 60 70 80 90 110 130 150
162 142 122 102 82 62 42 22 2 - 18
190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.
73 97.78 103.00
15
MONOPOLY REVENUES COSTS
200 150 100 50
Dollars
Q
0 1 2 3 4 5 6 7 8 9 10 11 12
13 14 15 16 17 18
750 500 250
Dollars
Q
0 1 2 3 4 5 6 7 8 9 10 11 12
13 14 15 16 17 18
16
MONOPOLY REVENUES COSTS
Elastic
200 150 100 50
Dollars
MR
D
Q
0 1 2 3 4 5 6 7 8 9 10 11 12
13 14 15 16 17 18
750 500 250
Dollars
TR
Q
0 1 2 3 4 5 6 7 8 9 10 11 12
13 14 15 16 17 18
17
MONOPOLY REVENUES COSTS
Inelastic
Elastic
200 150 100 50
Dollars
MR
D
Q
0 1 2 3 4 5 6 7 8 9 10 11 12
13 14 15 16 17 18
750 500 250
Dollars
TR
Q
0 1 2 3 4 5 6 7 8 9 10 11 12
13 14 15 16 17 18
18
OUTPUT AND PRICE DETERMINATION

• Cost Data
• MR MC Rule
• No Monopoly Supply Curve
• Monopoly Pricing Misconceptions
• Not Highest Price
• Total, Not Unit, Profit
• Possibility of Losses

Graphically
19
OUTPUT AND PRICE DETERMINATION
Profit Maximization Under Monopoly
Remember the MRMC Rule?
Profit Per Unit
MC
122
Profit
ATC
94
D
MR MC
MR
20
OUTPUT AND PRICE DETERMINATION
Profit Maximization Under Monopoly
Profit Per Unit
MC
122
Profit
ATC
94
D
MR MC
MR
21
OUTPUT AND PRICE DETERMINATION
Loss Minimization Under Monopoly
Loss Per Unit
MC
ATC
A
Loss
AVC
Pm
V
D
MR MC
MR
Qm
22
OUTPUT AND PRICE DETERMINATION
Loss Minimization Under Monopoly
Loss Per Unit
MC
ATC
A
Loss
AVC
Pm
V
D
MR MC
MR
Qm
23
INEFFICIENCY OF PURE MONOPOLY
P
S MC
At MRMC A monopolist will sell less units at
a higher price than in competition
Pm
Pc
D
MR
Q
Qc
Qm
24
INEFFICIENCY OF PURE MONOPOLY
P
S MC
At MRMC A monopolist will sell less units at
a higher price than in competition
Monopoly pricing effectively creates an income
transfer from buyers to the seller!
Pm
Pc
D
MR
Q
Qc
Qm
25
COST COMPLICATIONS
Economies of Scale
Simultaneous Consumption Network Effects
X-Inefficiency
Inefficient internal operation leads
to higher-than- necessary costs
26
COST COMPLICATIONS
Economies of Scale
Simultaneous Consumption Network Effects
X-Inefficiency
Rent-Seeking Expenditures
Rent-Seeking Behavior
Technological Advance
Assessment and Policy Options
Antitrust Action Regulate Natural Monopoly Ignore
it, if it is Short-Lived
27
PRICE DISCRIMINATION
Conditions
Monopoly Power Market Segregation No Resale
Consequences
More Profit More Production
Graphically
28
PRICE DISCRIMINATION
MC
Economic profits with a single MRMC price
P
ATC
Price and Costs
D
MR
Q
Q1
29
PRICE DISCRIMINATION
A perfectly discriminating monopolist has
MRD, producing more product and more profit!
MC
P
ATC
Price and Costs
MRD
D
Q
Q1
Q2
30
PRICE DISCRIMINATION
MC
Economic profits with price discrimination
P
ATC
Price and Costs
MRD
D
Q
Q1
Q2
31
REGULATED MONOPOLY
Natural Monopolies
Rate Regulation Socially Optimum Price P
MC Fair-Return Price P ATC Dilemma of Regulation
Graphically
32
REGULATED MONOPOLY
Monopoly Price MR MC
P
Pm
Price and Costs
ATC
MC
D
MR
Q
Qm
33
REGULATED MONOPOLY
P
Fair-Return Price Normal Profit Only
Price and Costs
ATC
Pf
MC
D
MR
Q
Qf
34
REGULATED MONOPOLY
P
Socially-Optimum Price P MC
Price and Costs
ATC
MC
Pr
D
MR
Q
Qr
35
REGULATED MONOPOLY
Dilemma of Regulation Which Price?
P
MR MC
Fair-Return Price
Pm
Socially-Optimum Price
Price and Costs
ATC
Pf
MC
Pr
D
MR
Q
Qm
Qf
Qr
36
REGULATED MONOPOLY
Dilemma of Regulation Which Price?
P
MR MC
Fair-Return Price
Chapter Conclusions
Pm
Socially-Optimum Price
Price and Costs
ATC
Pf
MC
Pr
D
MR
Q
Qm
Qf
Qr
37
KEY TERMS

• pure monopoly
• barriers to entry
• simultaneous consumption
• network effects
• X-inefficiency
• rent-seeking behavior
• price discrimination
• socially optimal price
• fair-return price

38
Next
Monopolistic Competition Oligopoly
Chapter 12