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Transcript of Pure Monopoly 10 Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved....
Pure Monopoly
10
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Four Market Models
LO1
Characteristics of the Four Basic Market Models
CharacteristicPure
CompetitionMonopolistic Competition Oligopoly Monopoly
Number of firms A very large number
Many Few One
Type of product Standardized Differentiated Standardized or differentiated
Unique; no close subs.
Control over price
None Some, but within rather narrow limits
Limited by mutual inter-dependence; considerable with collusion
Considerable
Conditions of entry
Very easy, no obstacles
Relatively easy Significant obstacles
Blocked
Nonprice competition
None Considerable emphasis on advertising, brand names, trademarks
Typically a great deal, particularly with product differentiation
Mostly public relation advertising
Examples Agriculture Retail trade, dresses, shoes
Steel, auto, farm implements
Local utilities
10-2
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
• Non-price competition – mostly PR or advertising the product
LO1
Public utility companies• Natural Gas• Electric• Water
Near monopolies• Intel• Wham-O
Professional sports teams
10-3
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 10-4
Monopoly Demand
• The pure monopolist is the industry
• Demand curve is the market demand curve
• Downsloping demand curve
• Marginal revenue is less than price
LO1 10-5
Monopoly Demand
• Marginal revenue < price
• Monopolist is a price maker
• Monopolist sets prices in elastic region of demand curve
LO2 10-6
Output and Price Determination
LO2
Steps for Graphically Determining the Profit-Maximizing Output, Profit-Maximizing Price, and Economic Profits (if Any) in Pure Monopoly
Step 1 Determine the profit-maximizing output by finding where MR=MC.
Step 2
Determine 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).
10-7
$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
LO2
0
D
MR
ATC
MC
MR=MCA=$94
EconomicProfit
Pm=$122
10-8
Misconceptions of Monopoly Pricing
• Not highest price
• Total profit
• Possibility of losses
LO2 10-9
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
10-11
Economic Effects of Monopoly
• Income transfer
• Cost complications
• Economies of scale
• X-Inefficiency
• Rent seeking expenditures
• Technological advance
LO3 10-12
Price Discrimination• Price discrimination
• Charging different buyers different prices
• Price differences are not based on cost differences
• Examples: business travel, electric utilities, movie theaters, golf courses, railroad companies, coupons, international trade
LO4
Price Discrimination
10-14
• Conditions for success:
• Monopoly power
• Market segregation
• No resale
Price Discrimination
LO4 10-15
Regulated Monopoly
• Natural monopolies
• Socially optimal price
• Set price = marginal cost
• Fair return price
• Set price = ATC
LO5 10-16