Pure Monopoly

10- 1

Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly

Pure Monopoly

10- 2


Market Structure Continuum

PureCompetition

PureMonopoly

MonopolisticCompetition Oligopoly

FOUR MARKET MODELSPure Monopoly:

10- 3


MONOPOLY EXAMPLES• Pure Monopoly• Near Monopoly• Natural Monopoly • Regulated Monopoly

10- 4


Aver

age

Tota

l Cos

t

Quantity

$20

15

10

0 50 100 200

LRATCIf LRATC declines over extended output, least-cost production is realized only if there is one producer - a natural monopoly.

THE NATURAL MONOPOLY CASE

10- 5


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

10- 6


MONOPOLY3 Basic Assumptions:

• Monopoly Status is Secure

• No Government Regulation

• Firm Charges the Same Price for all Units Sold

10- 7


MONOPOLY REVENUES & COSTS

MarginalRevenue

0

Quantityof

Output

Price(AverageRevenue)

TotalRevenue

MarginalCost

Profit +or

loss -

$172 $ 0 - $100

AverageTotalCost

TotalCost

$100

Revenue Data Cost Data

x = - =

10- 8


0 $172 $ 0 - $100$100


MarginalRevenue

0 1

90

Quantityof

Output


TotalRevenue

MarginalCost

Profit +or

loss -

$172 162

$ 0162 $162 - $100

- 28

AverageTotalCost

$190.00

TotalCost

$100190] ]


x = - =

MR = $162 – 0 = $162 MC = $190 – 100 = $90MR > MC

Loss Improvementfrom -$100 to -$28Check next unit of

output!

10- 9



MarginalRevenue

0 1 23456789

10

90807060708090

110130150

Quantityof

Output


TotalRevenue

MarginalCost

Profit +or

loss -

$172 162 152142132122112102928272

$ 0162304426528610672714736738720

$162142122102

82624222

2- 18

- $100- 28+ 34+ 86

+ 128+ 140+ 122

+ 74- 14

- 142- 310

AverageTotalCost

$190.00135.00113.33100.0094.0091.6791.4393.7397.78

103.00

TotalCost

$100190270340400470550640750880

1030

]]]]]]]]]]

]]]]]]]]]]


10- 10



MarginalRevenue

0 1 23456789

10

90807060708090

110130150

Quantityof

Output


TotalRevenue

MarginalCost

Profit +or

loss -

$172 162 152142132122112102928272

$ 0162304426528610672714736738720

$162142122102

82624222

2- 18

- $100- 28+ 34+ 86

+ 128+ 140+ 122

+ 74- 14

- 142- 310

AverageTotalCost

$190.00135.00113.33100.0094.0091.6791.4393.7397.78

103.00

TotalCost

$100190270340400470550640750880

1030

]]]]]]]]]]

]]]]]]]]]]


Can you see profitmaximization? MR > = MC

10- 11



Dol

lars

$200

150

100

50

Q0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

10- 12



Dol

lars

$200

150

100

50 MR

Elastic

DARPQ

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

10- 13



Dol

lars

$200

150

100

50 MR DARP

InelasticElastic

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18Q

• MR bisects DARP• When MR = 0 Total Revenue is

Maximized• When MR is positive D is elastic• When MR is negative D is inelastic

10- 14


OUTPUT AND PRICE DETERMINATION

• MR = MC Rule• No Monopoly Supply Curve• Market Demand is the

Monopoly Demand• Monopoly Misconceptions

• Not Highest Price• Possibility of Losses

Graphically…

10- 15


Profit Maximization Under Monopoly

DARP

MC

ATC

MR

$94

$122Profit

MR = MC

ProfitPer Unit


Q

200

175

150

125

100

75

50

25

0 1 2 3 4 5 6 7 8 9 10

Pric

e, c

osts

, and

reve

nue

10- 16


Profit Maximization Under Monopoly

DARP

MC

ATC

MR

$94

$122Profit

MR = MC

ProfitPer Unit


Q

200

175

150

125

100

75

50

25

0 1 2 3 4 5 6 7 8 9 10

Pric

e, c

osts

, and

reve

nue

What About

Loss Minimization?

10- 17


Loss Minimization Under Monopoly

DARP

MCATC

MR

APm

Loss

MR = MC

LossPer Unit


Q

200

175

150

125

100

75

50

25

0 1 2 3 4 5 6 7 8 9 10

Pric

e, c

osts

, and

reve

nue

AVC

Qm

V

Since Pm exceeds AVC,the firm will produce

10- 18


Loss Minimization Under Monopoly

D

MCATC

MR

APm

Loss

MR = MC

LossPer Unit


Q

200

175

150

125

100

75

50

25

0 1 2 3 4 5 6 7 8 9 10

Pric

e, c

osts

, and

reve

nue

AVC

Qm

V

What are theEconomic Effects

of Monopoly?

10- 19

Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly Q

INEFFICIENCY OF PURE MONOPOLYP

DARP

MR

S = MC

Pc

Pm

QcQm

At MR=MCa monopolistwill sell less

units at ahigher price

than incompetition

An industry in pure competitionsells where supply and

demand are equal

10- 20


INEFFICIENCY OF PURE MONOPOLYP

DARP

MR

S = MC

Pc

Pm

QcQm

At MR=MCA monopolistwill sell less

units at ahigher price

than incompetition

Monopoly pricing effectivelycreates a welfare transfer from buyers to the seller!

10- 21


COST COMPLICATIONSEconomies of Scale• Simultaneous consumption• Network effectsDiseconomies of Scale• X-Inefficiency• Rent-Seeking Behavior• Technological Advance

10- 22


Conditions•Monopoly Power•Market Segregation•No Resale

Consequences•More Profit•More Production

PRICE DISCRIMINATION

Graphically…

10- 23


DARPMR

MC

ATC

P

Q1

Pric

e an

d C

osts

Economic profits witha single MR=MC

price


10- 24


DARP

MC

ATC

P

Q1

Pric

e an

d C

osts


Q2

A perfectly discriminatingmonopolist has MR=D,

producing more productand more profit!

MR=D

10- 25


DARP

MC

ATC

P

Q1

Pric

e an

d C

osts

Economic profits withprice discrimination


Q2

MR=D

10- 26


10- 27


Monopoly Assessment& Policy Options

Antitrust Action•Sherman Act•Clayton Act•Ignore it, if it is short lived•Regulate Natural Monopolies

10- 28


Natural Monopolies

Socially Optimum PriceP = MCFair-Return PriceP = ATC

REGULATED MONOPOLY

Graphically…

10- 29


REGULATED MONOPOLY

Q

DARPMR

MCATC

P

Pric

e an

d C

osts

Monopoly PriceMR = MC

Qm

Pm

10- 30


REGULATED MONOPOLY

Q

DARPMR

MCATC

P

Pric

e an

d C

osts

Fair-Return PriceNormal Profit Only

Qf

Pf

10- 31


REGULATED MONOPOLY

Q

DARPMR

MCATC

P

Pric

e an

d C

osts

Socially-OptimumPrice

P = MC

Qr

Pr

10- 32


REGULATED MONOPOLY

Q

DARPMR

MCATC

P

Pric

e an

d C

osts

MR = MC

Fair-Return Price

Socially-OptimumPrice

Qm Qf Qr

Dilemma of RegulationWhich Price?

Pm

Pf

Pr

Pure Monopoly

Documents

Pure Monopoly