The Pure Monopoly

1
The Pure Monopoly

• The fun and excitement of a single firm in the
  industry!!!!

2
Characteristics of the Monopoly Market

• Single seller
• No close substitutes
• With marketable substitutes the monopoly would
  not retain price control
• Price maker
• As opposed to the PC firms price taking
• High barriers to entry
• Entry is restricted by technology, patents, or
  cash outlays
• Non-price competition
• Generally none, only to influence demand

3
Barriers to Entry

• Economies of Scale
• The cost of entering an industry and size of
  those in the industry dissuade others from
  entering
• Patents and Licenses
• Legal barriers keep other firms from entering
• Ownership of Resources
• DeBeers Diamond company markets about 70 of all
  diamonds in the world
• Pricing
• Lowering prices to drive out competition

4
Monopoly Demand

• The key to remember is that MR is less than Price
• Because of this the MR curve slopes down much
  faster than the demand curve

5
Do we understand MR???

• If we understand MR and how it relates to TR, we
  can answer the following question
• On two graphs, one on top of the other, please
  sketch a monopoly firm and below it a total
  revenue graph for the firm (no numbers required)

6
MRMC

• The monopoly firm still produces at the quantity
  for which MRMC.
• The Monopolist firm then goes to the demand curve
  to find its price
• up to the demand curve, make a left

7
Efficiency and the Monopoly firm

• Monopolies are NOT efficient producers
• Remember allocative and productive efficiency
  PMC and Pmin ATC
• In monopoly firms, because there is no threat of
  competition firms need not produce at minimum ATC
• Monopolies levy in effect a private tax on
  consumers which leads to redistribution of income
  and a loss of consumer surplus
• This is referred to as a deadweight loss to
  society

8
Efficiency and the Monopoly firm
9
Points of Efficiency

• Socially Optimal Price
• The socially optimal output is where PMC, this
  is a simulation of a PC market because it sets a
  legal price ceiling. The monopolist faced with a
  price ceiling will choose to produce all units
  for which PgtMC
• Fair Return Price
• This is a price at which PATC. At this point a
  firm will be returned exactly what it cost to
  produce, on a per-unit basis.

10
Results of Inefficiency

• The result of inefficiency is the under
  allocation of the good or service being provided
• As we can see in the graph below, a PC market
  would provide more goods, at a lower price than
  the monopoly market
• The result is fewer satisfied customers and a
  loss of benefit to society

11
Results of Inefficiency
12
Price Discrimination

• Since a monopolist is a price maker they can
  often discriminate in their prices, charging each
  customer what they are willing and able to pay
• This eliminates all consumer surplus by
  eliminating the difference between actual price
  and the price the consumer was willing to pay
• Airlines and cell phone companies are great
  examples of price discriminators