Chapter 12 Pure Monopoly Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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Chapter 12 Pure Monopoly
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-‐2
Introduction to Pure Monopoly
• Pure monopoly • Single seller – a sole producer • No close subs9tutes – unique product • Price maker – control over price • Blocked entry – strong barriers to entry • Non-‐price compe99on – mostly PR but can engage in adver9sing to increase demand
LO1
12-‐3
Examples of Monopoly
• Public u9lity companies • Natural gas • Electric • Cable television
• Near monopolies • Intel • Wham-‐O
• Professional sports teams LO1
12-‐4
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 essen9al resources • Pricing and other strategic barriers
LO2
12-‐5
Economies of Scale
0
Average total cost
Quan7ty
10
15
$20
50 100 200
ATC
LO2
12-‐6
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
LO3
12-‐7
Revenue and Cost Data of a Pure Monopolist
Revenue Data Cost Data (1) Quan9ty 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 (+) or Loss (-‐)
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
12-‐8
Monopoly Demand
0 1 2 3 4 5 6
$142 132 122 112 102 92 82
D
Gain = $132
Loss = $30
LO3
12-‐9
Monopoly Demand
• Marginal revenue will be less than price • Monopolist is a price maker • Monopolist sets price in the elas9c region of the demand curve
LO3
12-‐10
Demand, Marginal Revenue, and Total Revenue
$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
Price
Total reven
ue
Elas7c Inelas7c
Total-revenue curve
D MR
TR
LO3
12-‐11
Output and Price Determination
LO2
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 ver9cal 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 subtrac9ng the average total cost of the profit-‐maximizing output from the profit-‐maximizing price. Then mul9ply the difference by the profit-‐maximizing output to determine economic profit (if any).
Method 2. Find total cost by mul9plying the average total cost of the profit-‐maximizing output by that output. Find total revenue by mul9plying the profit-‐maximizing output by the profit-‐maximizing price. Then subtract total cost from total revenue to determine the economic profit (if any).
12-‐12
$200
175
150
125
25
100
75
50 Price, costs, and
revenu
e
1 2 3 4 5 6 7 8 9 10 Quan7ty
Output and Price Determination
0
D
MR
ATC
MC
MR=MC A=$94
Economic profit
Pm=$122
LO4
12-‐13
Misconceptions Concerning Monopoly Pricing
• Not the highest price • Total profit • Possibility of losses
LO4
12-‐14
Misconceptions of Monopoly Pricing
0
Price, costs, and
revenu
e
Quan7ty
D
MR
ATC
MC
MR=MC
Loss
AVC Pm
Qm
V
A
LO4
12-‐15
Economic Effects of Monopoly
(a) Purely compe77ve market
(b) Pure monopoly
D D
S=MC MC
P=MC= Minimum
ATC
MR
Pc
Qc
Pc
Pm
Qc Qm
a
b
c d
LO5
12-‐16
Economic Effects of Monopoly
• Income transfer • Cost complica9ons • Economies of scale • Simultaneous consump7on • Network effects • X-‐inefficiency • Rent-‐seeking behavior • Technological advance
LO5
12-‐17
X-Inefficiency
0
Average total costs
Quan7ty
ATC2
ATC1
ATCx
Q1 Q2
Average total cost
X
X' ATCx'
LO5
12-‐18
Assessment and Policy Options
• An9trust laws • Break up the firm
• Regulate it • Government determines price and quan9ty
• Ignore it • Let 9me and markets get rid of monopoly
LO5
12-‐19
Global Perspective
LO3
12-‐20
Price Discrimination
• Price discrimina7on • Charging different buyers different prices • Different prices are not based on cost differences
• Condi9ons for success • Monopoly power • Market segrega9on • No resale
LO6
12-‐21
Examples of Price Discrimination
• Business travel • Electric u9li9es • Movie theaters • Golf courses • Railroad companies • Coupons • Interna9onal trade
LO6
12-‐22
Graphical Analysis
MC = ATC MC = ATC
Qb
Qs
Ps
Pb
P P
MRb MRs Db
Ds
(a) Small businesses (b) Students
Economic profit
Economic profit
LO6
12-‐23
Regulated Monopoly
• Natural monopolies • Socially op7mal price • Set price equal to marginal cost
• Fair return price • Set price equal to average total cost
LO7
12-‐24
Regulated Monopoly
0
Price an
d costs (do
llars)
Quan7ty
Monopoly price
Fair-‐return price
Socially op7mal price
Pr
D r
f
b
a Pf
Pm
Qm Qf Qr
MR
MC
ATC
LO7
12-‐25
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 adract more users • Economies of scale
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