PURE MONOPOLY
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PURE MONOPOLY
CHARACTERISTICS OF PURE MONOPOLY
Single seller No close substitutes “Price maker” Blocked entry Non-price competition
ECONOMIES OF SCALE IN A PURE MONOPOLY
Economies of Scale = declining average total cost (ATC) as production increases
Pure Monopoly has a constant downward sloping long-run ATC curve
Long Run ATC in Pure Competition
Long Run ATC in Pure Monopoly
ECONOMIES OF SCALE IN A PURE MONOPOLY
Economies of Scale in a Pure Monopoly are a barrier to entry for other firms: Smaller scale = less economies of scale Massive amounts of start up costs and obtaining
financing to launch new large scale production
OTHER BARRIERS TO ENTRY
Patents Licenses Control of Resources
Private Property Rights Locational control of resources
Pricing Distribution agreements
MONOPOLY DEMAND
Assumptions: Barriers to entry ensure firm’s monopoly Government doesn’t regulate the monopolist The firm is a single-price monopolist
Charges same price for all units of output
Monopolist demand curve = market demand curve
Demand curve is not perfectly elastic = A downward sloping demand curve
MARGINAL REVENUE < PRICE
Monopolist can only increase sales by lowering price
But as single-price monopolist – by lowering price for the additional output, it must also lower prices for all of the previous units of production!
MARGINAL REVENUE < PRICE Example:
3 Halo IV video games at $55.00 each = $165 4 Halo IV video games at $45.00 each = $180 Forgone amount (revenue loss) = 3 x $10 ($55 - $45) = $30 MR = $45(1 additional unit) - $30(revenue
loss) = $15 P = $45.00 Therefore MR < P
MARGINAL AND TOTAL REVENUE CURVES
D
MR
TR
Points where Total Revenue is maximized
PROFIT MAXIMIZATION
Monopolistic firm competes for resources (just like in pure competition!)
Monopolistic firm will produce where MR = MC (just like in pure competition!)
Monopolistic firm will produce at the level of production which has the greatest positive difference between TR and TC (just like in pure competition!)
SUPPLY CURVE IN PURE MONOPOLY
Is there a supply curve in pure monopoly?
No!!!!
Why??? There is no unique relationship between price and
quantity supplied. The price and quantity supplied will always depend on the location of the demand curve!
MARGINAL COST AND REVENUE CURVES
D
MR
MC
QD
P Profit Maximization: MC = MR
Economic Profits
ATC
MISCONCEPTIONS ABOUT MONOPOLIES
Monopolists cannot charge the highest price it can get Maximize profits where TR – TC is greatest Depends on quantity sold and price
Total profits is the goal of monopolists Unit profit does not indicate profit maximization
Pure monopoly doesn’t guarantee profit
LOSSES IN MONOPOLY
Causes of Loss: Change in people’s tastes Upward shifting cost curves (ex: rise in resources)
Effects of Loss: Monopoly firm will continue to operate for a while
even if incurring losses IF Total loss < fixed costs Price > AVC
Firm will reallocate resources to more profitable industries
ECONOMIC EFFECTS OF MONOPOLY
Monopolies will sell less products at a higher price
Monopoly price will exceed marginal cost and marginal revenue b/c consumers will still pay at the higher level
Allocative efficiency is not achieved Productive efficiency is not achieved Efficiency loss (or deadweight loss) occurs
INCOME EFFECTS OF MONOPOLY
Income distribution more unequal Business owners receive unbalance share of
income from consumers
COST COMPLICATIONS OF MONOPOLY
Extensive Economies of Scale = monopoly has a lower ATC than purely competitive firms
X-inefficiency – output is produced at a higher cost than is necessary to produce it (no incentive to be more efficient)
Rent-seeking behavior – trying to obtain/maintain a monopoly even at a cost to the consumer or society
Rate of technological advances slowed – less incentives to improve technology which would improve efficiency
PRICE DISCRIMINATION
Occurs when a given product is sold at more than one price and the price differences are not based on cost differences Charging each customer a single market maximum
price Charging each customer one price for the first set
of units purchased and a lower price for subsequent sets of units
Charging one group of customers one price and another group a different price
PRICE DISCRIMINATION
Success = Monopoly power to control output and price Ability to segregate the market (based on differing
elasticities of demand) Buyers unable to resell the original product or service
Examples: Airline tickets (business vs. coach) Electric utilities (higher rates during the day) Discount coupons Movie theaters and golf courses
PRICE DISCRIMINATION
Different groups result in different demand curves and MR curves
Results in different profit maximization and quantity levels
Each segment still follows MR = MC output and price level
SOCIALLY OPTIMAL PRICE VS. FAIR RETURN PRICE
Gov’t might set a price at the “socially optimal price” (P = MC) – where production is allocatively efficient
OR…Gov’ts may set artificial price level higher/lower than the socially optimum price (Fair Return Price) To give the firm a “fair return” on it’s investment and
avoid losses Where P > ATC or P = Avg cost (instead of MC) EX: Washington Metro
Right now P < ATC so govt’s have to subsidize Metro
MARGINAL COST AND REVENUE CURVES
D
MR
MC
QD
P
Profit Maximization: MC = MR
Economic Profits
ATC
Socially Optimal Price:
MC = D
Fair Return Price: ATC = D
(Only NORMAL Profits)
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