Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights...

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Page 1: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Pure Monopoly

10

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Page 2: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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 10-2

Page 3: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Examples of Monopoly

• Public utility companies

• Natural Gas

• Electric

• Water

• Near monopolies

• Intel

• Wham-O

• Professional Sports TeamsLO1 10-3

Page 4: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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

Page 5: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Economies of Scale

LO1

10

15

$20

50 100 200

ATC

10-5

Page 6: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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 10-6

Page 7: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Table 10.1 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 (+)

orLoss (-)

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

LO1 10-7

Page 8: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Monopoly Demand

LO1

D

Gain = $132

Loss = $30

• All customers must pay the same price

10-8

Page 9: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

D

Gain = $132

Loss = $30

Monopoly Demand

LO1

• All customers must pay the same price

MR

10-9

Page 10: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Monopoly Demand

• Marginal Revenue < Price

• Monopolist is a price maker

• Monopolist sets prices in elastic region of demand curve

LO2 10-10

Page 11: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Output and Price Determination

LO2

Elastic Inelastic

Demand and Marginal-Revenue Curves

Total-Revenue Curve

DMR

TR

10-11

Page 12: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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).

10-12

Page 13: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

$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

10-13

Page 14: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Misconceptions of Monopoly Pricing

• Not highest price

• Total profit

• Possibility of losses

LO2 10-14

Page 15: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Misconceptions of Monopoly Pricing

LO2

0

D

MR

ATC

MC

MR=MC

Loss

AVCPm

Qm

V

A

10-15

Page 16: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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

10-16

Page 17: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Economic Effects of Monopoly

• Income transfer

• Cost complications

• Economies of scale

• X-Inefficiency

• Rent seeking expenditures

• Technological advance

LO3 10-17

Page 18: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

X-Inefficiency

LO3

ATC2

ATC1

ATCx

Q1 Q2

Averagetotal cost

X

X'ATCx'

10-18

Page 19: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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

LO3 10-19

Page 20: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Global Perspective

LO3

Competition from Foreign Multinational Corporations

10-20

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Price Discrimination

• Price discrimination

• Charging different buyers different prices

• Price differences are not based on cost differences

• Conditions for success:

• Monopoly power

• Market segregation

• No resaleLO4 10-21

Page 22: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Examples of Price Discrimination

• Business travel

• Electric utilities

• Movie theaters

• Golf courses

• Railroad companies

• Coupons

• International trade

LO4 10-22

Page 23: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Graphical Analysis

LO4

MC = ATC MC = ATC

Qb

Qs

Ps

Pb

P P

MRbMRs

Db

Ds

(a) Small businesses (b) Students

Economic profit Economic

profit

10-23

Page 24: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Regulated Monopoly

• Natural monopolies

• Socially optimal price

• Set price = marginal cost

• Fair return price

• Set price = ATC

LO5 10-24

Page 25: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Regulated Monopoly

LO5

MonopolyPrice

Fair-ReturnPrice

SociallyOptimal

Price

Pr

D

r

f

b

aPf

Pm

Qm Qf Qr

MR

MC

ATC

10-25

Page 26: Pure Monopoly 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

De Beers’s Diamonds

• De Beers once controlled about 80% of the world’s diamond market

• Monopoly position eroded over time

• New diamond discoveries

• Nearly perfect artificial diamonds

• Unfavorable media attention

• Now focus on increasing demand for diamonds rather than controlling supply

10-26


Pure Monopoly 10 Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

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McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Pure Monopoly Chapter 10.

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Pure Monopoly Chapter 10.

11 - 1 Copyright McGraw-Hill/Irwin, 2005 Four Market Models Monopoly Examples Barriers to Entry The Natural Monopoly Case Monopoly Demand Monopoly Revenues.

11 - 1 Copyright McGraw-Hill/Irwin, 2005 Four Market Models Monopoly Examples Barriers to Entry The Natural Monopoly Case Monopoly Demand Monopoly Revenues.

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Chapter 5 Perfect Competition, Monopoly, and Economic versus Normal Profit Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.

Chapter 5 Perfect Competition, Monopoly, and Economic versus Normal Profit Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.

CHAPTER 12. MONOPOLY McGraw-Hill/IrwinCopyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

CHAPTER 12. MONOPOLY McGraw-Hill/IrwinCopyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter 8: Pure Monopoly. Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin What is a Pure Monopoly? A pure monopoly.

Chapter 8: Pure Monopoly. Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin What is a Pure Monopoly? A pure monopoly.

1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter 8 The Economics of Monopoly Power: Who Does What to Whom? Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Chapter 8 The Economics of Monopoly Power: Who Does What to Whom? Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Monopoly. Chapter Outline ©2015 McGraw-Hill Education. All Rights Reserved. 2 Defining Monopoly Five Sources Of Monopoly The Profit-maximizing Monopolist.

Monopoly. Chapter Outline ©2015 McGraw-Hill Education. All Rights Reserved. 2 Defining Monopoly Five Sources Of Monopoly The Profit-maximizing Monopolist.