monopoly
DESCRIPTION
concept of monopoly with examplesTRANSCRIPT
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Pure Monopoly
Chapter 10
Chapter Objectives
• Characteristics of pure monopoly• Profit-maximizing output and price• Economic effects of monopoly• Charging different prices in
different markets
10-2
Characteristics of Monopoly
1. Single seller
No close substitutes – unique product
“Price maker”
Blocked entry
Reasons behind blocked Entry
EconomicalTechnologicalLegal
1.Economical barrier for blocked entry in Pure Monopoly
Example
2. Technological barrier for blocked entry in Pure Monopoly
Example
3.Legal barrier for blocked entry in Pure Monopoly
Up to late 1990s
Non price competition
Non price competition
• Two types of product a Monopolist have. Either
“ Standardized or Differentiated ”Products
Standardized
• As natural gas
Differentiated
Examples of Monopoly1. Pure Monopoly
Regulated or natural monopolies
Electricity
Examples of Monopoly
Near monopolieshave about 80 % share of Market as
Intel De Beers
Examples of Monopoly• Geographic monopolies
–Professional sport teams
• Dual objectives of study
For understanding two other market models Oligopoly and Monopolistic Competition. Because these two markets combine in different degrees and characteristics of pure competition and pure Monopoly.
Barriers to Entry• Economies of scale• Legal barriers to entry
–Patents–Licenses
• Ownership or control of essential resources
• Pricing and other strategic barriers to entry
Monopoly Demand
“ After discussing the sources, in order to understand fully pure Monopoly we have to analyze the Price and output decision of Pure Monopoly”
Monopoly Demand• Assumptions:
1. Monopoly status is secure2. No government regulation3. Single-price monopolist
• Face down-sloping demand–Entire market demand
Downward sloping demand has Three Implications
0 1 2 3 4 5 6
$142
132
122
112
102
92
82
Price and Marginal Revenue1. Marginal revenue is less than price
D
• A monopolist isselling 3 units at$142
• To sell 4, price mustbe lowered to $132
• All customers must pay the sameprice
• TR increases $132 minus $30 (3x$10)
Gain = $132
Loss = $30
10-26
0 1 2 3 4 5 6
$142
132
122
112
102
92
82
D
• A monopolist isselling 3 units at$142
• To sell 4, price mustbe lowered to $132
• All customers must pay the sameprice
• TR increases $132 minus $30 (3x$10)
• $102 becomes a point on the MR curve
• Try other prices todetermine other MR points
Gain = $132
Loss = $30
The Constructed Marginal Revenue CurveMust Always Be Less Than the Price
MR
Price and Marginal RevenueMarginal revenue is less than price
Down-Sloping Demand• Marginal revenue < price
–To increase sales, must lower price• Firm is a price maker
–Choose P,Q combination• Operate in the elastic region
–Marginal revenue > 0–Total-revenue test (recall)
• For a competitive firm: P = MR = MC.• For a monopoly firm: P > MR = MC
Difference between pure competition and monopoly
Profit Maximization
• Output-price determination–Marginal revenue marginal cost rule–Same cost definitions
• No supply curve
10-32
Monopoly Revenue and Costs
(1)Quantity
Of Output
(2)Price
(AverageRevenue)
(3)Total
Revenue(1) X (2)
(4)MarginalRevenue
(5)Average
Total Cost
(6)Total Cost
(1) X (5)
(7)Marginal
Cost
(8)Profit (+)
or Loss (-)
0123456789
10
$172162152142132122112102928272
$0162304426528610672714736738720
$16214212210282624222
2-18
$190.00135.00113.33100.00
94.0091.6791.4393.7597.78
103.00
$100190270340400470550640750880
1030
$90807060708090
110130150
$-100-28+34+86
+128+140+122
+74-14
-142-310
Revenue Data Cost Data
]]]]]]]]]]
]]]]]]]]]]
Can you See Profit Maximization?10-34
$200
150
100
50
0
$750
500
250
0
2 4 6 8 10 12 14 16 18
2 4 6 8 10 12 14 16 18
Pri
ceT
ota
l Rev
enu
e
Monopoly Revenue and Costs
Elastic Inelastic
Demand and Marginal-Revenue Curves
Total-Revenue Curve
DMR
TR
10-35
Profit Maximization
0
$200
175
150
125
25
100
75
50Pri
ce, C
ost
s, a
nd
Rev
enu
e
1 2 3 4 5 6 7 8 9 10
Quantity
D
MR
ATC
MC
MR=MC
Pm=$122
A=$94
EconomicProfit
Misconceptions
• Not the highest price• Total, not unit, profit• Possibility of losses
10-37
Loss Minimization
0
Pri
ce, C
ost
s, a
nd
Rev
enu
e
Quantity
D
MR
ATC
MC
MR=MC
Loss
AVCPm
Qm
V
A
10-38
Economic Effects
PurelyCompetitive
Market
PureMonopoly
D D
S=MC MC
P=MC=Minimum
ATC
MR
Pc
Qc
Pc
Pm
QcQm
Pure competition is efficientMonopoly is inefficient
a
b
c
10-39
• Pure competition is efficient–Productive efficiency–Allocative efficiency–CS+PS maximized
• Monopoly is inefficient–Charge P>MC–Deadweight loss
• Income transfer
Economic Effects
10-40
Cost Complications
• Economies of scale–Simultaneous consumption–Network effects
• X-inefficiency–Lowest ATC not achieved
• Rent seeking behavior• Technological advance
–More likely with monopoly?
10-41
Price Discrimination
• Three forms
– Charge each customer max willingness to pay
– Charge one price for first unit and a lower price for subsequent units
– Charge different customers different prices
10-42
• Conditions – Monopoly power– Market segregation– No resale
• Examples – Airfares– Electric utilities– Theaters & golf courses
Price Discrimination
10-43
Regulated Monopoly
• Natural monopolies• Rate regulation• Socially optimum price
P = MC• Fair return price
P = ATC
10-44
0
Pri
ce a
nd
Co
sts
(Do
llars
)
Quantity
Dilemma of RegulationMonopoly
Price
Fair-ReturnPrice
SociallyOptimal
Price
Pr
D
r
f
b
aPf
Pm
Qm Qf Qr
MR
MC
ATC
Regulated Monopoly
10-45
De Beers Diamonds• 66 years of monopoly pricing
–Independent producers went along • Mid-2000 abandoned monopoly
–New discoveries–Independent producers withdrew–Political considerations
• New strategy–“The diamond supplier of choice”
10-46
Key Terms• pure monopoly• barriers to entry• simultaneous consumption• network effects• X-inefficiency• rent-seeking behavior• price discrimination• socially optimal price• fair-return price
10-47
Next Chapter Preview…
Monopolistic Competitionand Oligopoly
10-48