Pure Monopoly Chapter 10

Characteristics of Monopoly Single seller No close substitutes “Price maker” Blocked entry Nonprice competition 10-2

Examples of Monopoly Regulated or natural monopolies Near monopolies electricity Near monopolies Western Union Geographic monopolies Professional sport teams 10-3

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 10-4

Monopoly Demand Assumptions: Face down-sloping demand Monopoly status is secure No government regulation Single-price monopolist Face down-sloping demand Entire market demand 10-5

Price and Marginal Revenue Marginal revenue is less than price A monopolist is selling 3 units at $142 To sell 4, price must be lowered to $132 All customers must pay the same price TR increases $132 minus $30 (3x$10) 1 2 3 4 5 6 $142 132 122 112 102 92 82 Loss = $30 D Gain = $132 10-6

Price and Marginal Revenue Marginal revenue is less than price A monopolist is selling 3 units at $142 To sell 4, price must be lowered to $132 All customers must pay the same price TR increases $132 minus $30 (3x$10) $102 becomes a point on the MR curve Try other prices to determine other MR points 1 2 3 4 5 6 $142 132 122 112 102 92 82 Loss = $30 D Gain = $132 MR The Constructed Marginal Revenue Curve Must Always Be Less Than the Price 10-7

Down-Sloping Demand Marginal revenue < price Firm is a price maker To increase sales, must lower price Firm is a price maker Choose P,Q combination Operate in the elastic region Marginal revenue > 0 Total-revenue test (recall) 10-8

Profit Maximization Output-price determination No supply curve Marginal revenue marginal cost rule Same cost definitions No supply curve 10-9

Monopoly Revenue and Costs Revenue Data Cost Data (2) Price (Average Revenue) (3) Total Revenue (1) X (2) (1) Quantity Of Output (4) Marginal Revenue (5) Average Total Cost (6) Total Cost (1) X (5) (7) Marginal Cost (8) Profit (+) or Loss (-) 1 2 3 4 5 6 7 8 9 10 $172 162 152 142 132 122 112 102 92 82 72 $0 162 304 426 528 610 672 714 736 738 720 $100 190 270 340 400 470 550 640 750 880 1030 $-100 -28 +34 +86 +128 +140 +122 +74 -14 -142 -310 ] $162 142 122 102 82 62 42 22 2 -18 ] $90 80 70 60 90 110 130 150 $190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.75 97.78 103.00 Can you See Profit Maximization? 10-10

Monopoly Revenue and Costs Demand and Marginal-Revenue Curves Elastic Inelastic $200 150 100 50 $750 500 250 2 4 6 8 10 12 14 16 18 Price Total Revenue D MR Total-Revenue Curve TR 10-11

Profit Maximization MC Price, Costs, and Revenue ATC D MR=MC MR $200 175 150 125 25 100 75 50 Price, Costs, and Revenue 1 2 3 4 5 6 7 8 9 10 Quantity MC Pm=$122 Economic Profit ATC A=$94 D MR=MC MR 10-12

Misconceptions Not the highest price Total, not unit, profit Possibility of losses 10-13

Loss Minimization MC Price, Costs, and Revenue ATC AVC D MR=MC MR Quantity MC ATC A Loss Pm AVC V D MR=MC MR Qm 10-14

Pure competition is efficient Monopoly is inefficient Economic Effects Purely Competitive Market Pure Monopoly S=MC MC Pm b P=MC= Minimum ATC Pc Pc c a D D MR Qc Qm Qc Pure competition is efficient Monopoly is inefficient 10-15

Economic Effects Pure competition is efficient Monopoly is inefficient Productive efficiency Allocative efficiency CS+PS maximized Monopoly is inefficient Charge P>MC Deadweight loss Income transfer 10-16

Cost Complications Economies of scale X-inefficiency Simultaneous consumption Network effects X-inefficiency Lowest ATC not achieved Rent seeking behavior Technological advance More likely with monopoly? 10-17

Policy Options Use antitrust laws Natural monopoly Ignore Divide the firm Natural monopoly Regulate price Ignore Unstable in long run 10-18

Price Discrimination Three forms Charge each customer max willingness to pay Charge one price for first unit and a lower price for subsequent units Charge different customers different prices 10-19

Price Discrimination Conditions Examples Monopoly power Market segregation No resale Examples Airfares Electric utilities Theaters & golf courses 10-20

Socially optimum price Fair return price Regulated Monopoly Natural monopolies Rate regulation Socially optimum price P = MC Fair return price P = ATC 10-21

Regulated Monopoly Dilemma of Regulation Monopoly Price Fair-Return Price and Costs (Dollars) Quantity Monopoly Price Pm Fair-Return Price Socially Optimal Price f Pf a ATC Pr r MC D MR b Qm Qf Qr 10-22