Pure Monopoly

1
Pure Monopoly
2
FOUR MARKET MODELS
Pure Monopoly

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

3
MONOPOLY EXAMPLES
Natural Monopoly Regulated Monopoly Monopoly
Power
4
BARRIERS TO ENTRY

• Economies of Scale
• The Natural Monopoly Case
• Minimum Efficient Scale
• Legal Barriers to Entry
• Patents
• Licenses
• Ownership or Control of Essential Resources

5
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
6
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

7
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
8
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 gt MC Loss Improvement from -100 to -28 Check
next unit of output!
9
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
MR gt 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
Can you see profit maximization?
10
Monopoly Revenue and Costs

• Demand, Marginal Revenue, and Total Revenue for a
  Pure Monopolist

Demand and Marginal Revenue Curves
Elastic
Inelastic
D
MR
Total-Revenue Curve
TR
11
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
12
OUTPUT AND PRICE DETERMINATION
Profit Maximization Under Monopoly
Remember the MRMC Rule?
Profit Per Unit
MC
122
Profit
ATC
94
D
MR MC
MR
13
PRICE DISCRIMINATION
Conditions
Monopoly Power Market Segregation No Resale
Consequences
More Profit More Production
Graphically
14
PRICE DISCRIMINATION
MC
Economic profits with a single MRMC price
P
ATC
Price and Costs
D
MR
Q
Q1
15
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