Pure Monopoly The Seller’s Delight

The Opposite End of the Spectrum Pure Competition Monopolistic Competition Oligopoly Monopoly

When do we deal with Monopolies? A Monopoly is from the Greek monos, which means single or alone. There is a sole firm, alone to reap all of the profits and provide the product or service. Often industries start with a monopoly. Such as Microsoft (Software), Bell (Telecom.), Bayer (Aspirin and other drugs).

Pure Monopoly Exists When… Single Seller: Only game in town. The firm and the industry can often be synonymous. No Close Substitutes: unique product that you would have to do without if you didn’t buy it. Price-Maker: If you control the supply, you can manipulate price. Demand curve still exists. Blocked Entry: Economic, tech., legal, or geographic. Barriers prevent competition.

The Barriers to Entry: Maintaining a Monopoly If there are profits to be had, new businesses would enter the industry unless they are being prevented in some way. 1)Economies of Scale: Declining ATC with increased firm size. For some large firms, Long-Run ATC is too low for most to compete. (Procter & Gamble NYSE:PG) (Procter & Gamble NYSE:PG)

The Barriers to Entry: Maintaining a Monopoly 2) Legal Barriers: Patents The exclusive right to an invention, generally 17 years. (Johnson & Johnson: JNJ)(Johnson & Johnson: JNJ) Licenses The government can legally restrict others from operating or competing without a license to do so. (Bell Canada Enterprises: BCE)(Bell Canada Enterprises: BCE)

The Barriers to Entry: Maintaining a Monopoly 3) Ownership of Essential Resources: A company might own the resource required to make the product. (De Beers Diamond Company)(De Beers Diamond Company) 4) Pricing or Strategic Barrier: Heavy pricing discounts can drive competition out of business, or heavy advertising can effectively eliminate other brands. (Coca-Cola: KO or Pepsi: PEP)Coca-Cola: KO Pepsi: PEP

Monopoly and Demand In Pure Competition, demand is perfectly elastic because the seller has no influence on the overall market. The Monopolist is the Industry, they are the sole supplier. So they must face a downward sloping demand curve. Therefore, MR is not Demand.

Marginal Revenue < Price A Monopolist must reduce its price to increase sales. Each Marginal Unit sold increases revenue by an amount equal to its own price, but less the sum of the price cuts needed on all previous units. This means that Marginal Revenue is < Price or (Average Revenue) and below Demand. 10-3

The Monopolist is a Price Maker In deciding what output to produce, the Monopolist is deciding what price to charge. This is true because the Monopolist is the industry and, therefore, determines Supply. In Pure Competition, what happens when the business tries to raise the price by reducing its output?

The Monopolist Sets Prices in the Elastic Region of Demand When demand is elastic, a decline in price increases TR. When demand is inelastic, a decline in price reduces TR. A profit maximizing firm wants to avoid inelastic price reductions. Less Total Revenue and Higher Total Costs means Less Profit.