Monopoly Chapter 9.

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Presentation transcript:

Monopoly Chapter 9

Characteristics of Pure Monopoly Single Seller – one firm industry – the firm and industry are synonymous No Close Substitutes – buyers have no alternative Price Maker Blocked Entry

Barriers to Entry Economies of Scale – financial obstacles and the risk of starting big are prohibitive in such industries Natural Monopoly – economies of scale are so great that there is only room for one firm to produce the good at min ATC Graph

Barriers to Entry (cont.) Legal Barriers to Entry Patents Licenses Ownership or Control of Essential Resources Diamonds Strategic Barriers – price cutting to drive out competition

Monopoly Demand Assumptions 1. The firm is not regulated 2. The firm is a single price monopolist Marginal Revenue is less than price Because the monopolist must set a lower price to obtain greater sales, marginal revenue is less than price for every level of output except the first. Chart Graph

Monopoly Demand (cont.) The monopolist prices in the elastic region of the demand curve. Graph

Output and Price Determination Profit Maximization: Graph There is a possibility of monopoly losses. As with perfectly competitive firms, monopolies will produce at a loss as long as price exceeds AVC

Effects of Monopoly - Efficiency Monopolies are not productive or allocative efficiency. Monopolies produce less than what society wants. P>MC P>min ATC Graph

Cost Complications of Monopoly X-Inefficiency – when a firm’s actual cost of producing a level of output is greater than the lowest cost of producing that level of output Rent Seeking Expenditures – lobbying costs associated with maintaining and running a monopoly Technological Advance – monopolies usually have little incentive to implement technology

Price Discrimination Definition – The practice of charging customers different prices for the same good or service Conditions necessary for price discrimination 1. Monopoly 2. Market Segregation 3. No resale

Consequences of Price Discrimination For the perfectly discriminating monopolist, D=MR Graph Results – More profit, more output

Regulated Monopoly Social Optimal Price: P=MC Fair Return Price: P=ATC – at this point the firm will earn a normal profit