Chapter 12 Pure Monopoly Introduction to Pure Monopoly

Chapter 12 Pure Monopoly

Introduction to Pure Monopoly • Pure monopoly • Single seller – a sole producer • No close substitutes – unique product • Price maker – control over price • Blocked entry – strong barriers to entry • Non-price competition – mostly PR but can engage in advertising to increase demand LO 1 12 -2

Barriers to Entry • Barriers to entry are factors that prevent firms from entering the industry • Economies of scale • Legal barriers to entry like patents and licenses • Ownership or control of essential resources • Pricing and other strategic barriers LO 2 12 -3

Economies of Scale Average total cost $20 15 0 LO 2 ATC 10 50 100 Quantity 200 12 -4

Monopoly Demand • The pure monopolist is the industry • Monopolist demand curve is the market demand curve • Demand curve is downsloping • Marginal revenue is less than price LO 3 12 -5

Monopoly Demand • Marginal revenue will be less than price • Monopolist is a price maker • Monopolist sets price in the elastic region of the demand curve LO 3 12 -6

Demand, Marginal Revenue, and Total Revenue Elastic $200 Inelastic Price 150 100 50 0 MR 2 4 $750 Total revenue D 6 8 10 12 Total-revenue curve 14 16 18 500 250 TR 0 LO 3 2 4 6 8 10 12 14 16 18 12 -7

Output and Price Determination Steps for Graphically Determining the Profit-Maximizing Output, Profit. Maximizing Price, and Economic Profit (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 3 Determine 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). 12 -8

Misconceptions Concerning Monopoly Pricing • Not the highest price • Total profit • Possibility of losses LO 4 12 -9

Economic Effects of Monopoly • Income transfer • Cost complications • Economies of scale • Simultaneous consumption • Network effects • X-inefficiency • Rent-seeking behavior • Technological advance LO 5 12 -10

X-Inefficiency Average total costs ATCx ATC 1 X' ATCx' Average total cost ATC 2 0 LO 5 X Q 1 Quantity Q 2 12 -11

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 LO 5 12 -12

Price Discrimination • Price discrimination • Charging different buyers different prices • Different prices are not based on cost differences • Conditions for success • Monopoly power • Market segregation • No resale LO 6 12 -13

Graphical Analysis P P Economic profit Pb Economic profit MC = ATC Qb MC = ATC Ds Qs MRb (a) Small businesses LO 6 Ps Db MRs (b) Students 12 -14

Regulated Monopoly • Natural monopolies • Socially optimal price • Set price equal to marginal cost • Fair return price • Set price equal to average total cost LO 7 12 -15

Monopoly Power in the Internet Age • • Google dominates search Facebook dominates social media Amazon dominates as an online retailer Barriers of entry • Network effects of being large attract more users • Economies of scale 12 -16