1. Chapter 24: Pure Monopoly

2. Pure Monopoly I. INTRODUCTION A. Main Characteristics
Single Seller: only one firm is the sole producer of the product in the market (the firm and the industry are the same).
No Close Substitutes: the monopolist sells a unique product that has no close substitutes.
Price Making: the monopolist controls total quantity supplied to the market and thus has control over the price.

3. Blocked Entry: the monopolist has no immediate competitors because certain barriers prevent potential competitors from entering the market.
Non-price Competition: monopolists that sell standardized products engage mainly in public relations advertising, whereas those with differentiated products sometimes advertise their products’ attributes.

4. B. Monopoly Examples Pure Monopoly: the existence of one producer.
Near Monopolies: the existence of more than one producer, but one of them has a very large market share.

5. II. BARRIERS TO ENTRY
Economies of Scale (Natural Monopoly): some industries require producing large output to achieve lower average total cost. Thus, economies of scale serve as entry barrier.

6. ATC THE NATURAL MONOPOLY CASE
$20 15
ATC
Average Total Cost 10
If ATC declines over extended output, least-cost production is realized only if there is one producer - a natural monopoly 50
100
200
Quantity

7. Legal Barriers to Entry:
Patents: a patent is the exclusive right of an inventor to use, or allowing others, to use its invention. Patents provide the inventor with a monopoly position for the life of the patent (i.e. 20 years).
Licenses: the government blocks entry to an industry through the control of issuance of licenses.
Ownership or Control of Essential Resources
Pricing and Other Strategic Barriers to Entry

8. III. MONOPOLY DEMAND Basic Assumptions: Monopoly Status is Secured
2) No Governmental Regulation
3) Firm Charges the Same Price for all Units Sold

9. NOTES:
Market Demand Curve is the Firm’s Demand Curve
The monopolist sets the price in the elastic region of demand.
In the elastic region of demand, lower price leads to higher total revenue.
The monopolist avoids the inelastic region in the demand curve.
Profit maximization and loss minimization rule of monopolist: MR = MC
Note that price > MR

10. MONOPOLY REVENUES & COSTS
Elastic
$200
150
200 50
Dollars MR D Q
$750
500
250
Dollars TR Q

11. MONOPOLY REVENUES & COSTS
Elastic
Inelastic
$200
150
200 50
Dollars MR D Q
$750
500
250
Dollars TR Q

12. The monopolist has no supply curve.
The monopolist equates MR and MC to determine output.
The monopolist does not set the highest possible price.
Monopolist’s goal is maximum profit not maximum price.
Higher price may lead to less profit.

13. MONOPOLY REVENUES & COSTS
Revenue Data
Cost Data
Quantity of
Output
Price
(Average
Revenue)
Average
Total
Cost
Profit + or
loss -
Total
Revenue
Marginal
Revenue
Total
Cost
Marginal
Cost x
$172 =
$ 0 -
$100 =
- $100

14. MONOPOLY REVENUES & COSTS
Revenue Data
Cost Data
Quantity of
Output
Price
(Average
Revenue)
Average
Total
Cost
Profit + or
loss -
Total
Revenue
Marginal
Revenue
Total
Cost
Marginal
Cost 1
$172
$172
162
$ 0
$ 0
162
$100
190
$100
- $100
- $100
- 28 ]
$162 ] 90 x = -
$190.00 =
MR = $162 – 0 = $162
MC = $190 – 100 = $90
MR > MC
Loss Improvement
from -$100 to -$28
Check next unit of
output!

15. MONOPOLY REVENUES & COSTS
Revenue Data
Cost Data
Quantity of
Output
Price
(Average
Revenue)
Average
Total
Cost
Profit + or
loss -
Total
Revenue
Marginal
Revenue
Total
Cost
Marginal
Cost 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
110
130
150
$190.00
135.00
113.33
100.00
94.00
91.67
91.43
93.73
97.78
103.00

16. Can you see profit maximization? MR > = MC
MONOPOLY REVENUES & COSTS
Revenue Data
Cost Data
Quantity of
Output
Price
(Average
Revenue)
Average
Total
Cost
Profit + or
loss -
Total
Revenue
Marginal
Revenue
Total
Cost
Marginal
Cost
Can you see profit
maximization? 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
MR > = MC ]
$162
142
122
102 82 62 42 22 2
- 18 ] 90 80 70 60
110
130
150
$190.00
135.00
113.33
100.00
94.00
91.67
91.43
93.73
97.78
103.00

17. IV. OUTPUT AND PRICE DETERMINATION
Cost Data
MR = MC Rule
No Monopoly Supply Curve
Monopoly Pricing Misconceptions:
Not Highest Price
Total, Not Unit, Profit
Possibility of Losses
Graphically…

18. Remember the MR=MC Rule?
OUTPUT AND PRICE DETERMINATION
Case 1: Profit Maximization Under Monopoly
Remember the MR=MC Rule? Q
200
175
150
125
100 75 50 25
Price, costs, and revenue
Profit
Per Unit MC
$122
Profit
ATC
$94 D
MR = MC MR

19. Case 2 :Loss Minimization Under Monopoly
OUTPUT AND PRICE DETERMINATION
Case 2 :Loss Minimization Under Monopoly Q
200
175
150
125
100 75 50 25
Price, costs, and revenue
Since Pm exceeds AVC,
the firm will produce
Loss
Per Unit MC
ATC A
Loss
AVC Pm V D
MR = MC MR Qm

20. V. Economic Effects of Monopoly
What are the Economic Effects of Monopoly?
Monopoly pricing effectively creates an income transfer from buyers to the seller!
X-Inefficiency: When the cost of producing is more than the lowest possible cost Monopolists are likely to experience X inefficiency than pure competition producers (who are under pressures)
Rent-Seeking Behavior: using the monopolistic position to make more profits.
Technological Advance: monopolists are less likely to care about Research & Development.

21. INEFFICIENCY OF PURE MONOPOLY
An industry in pure competition
sells where supply and
demand are equal P
S = MC
At MR=MC
A monopolist
will sell less
units at a
higher price
than in
competition Pm Pc D MR Q Qm Qc

22. Inefficient internal operation leads to higher-than- necessary costs
Average total costs
Quantity
Average
Total Costs X X’ Q1 Q2
ATCx
ATC1
ATC2
ATCx’

23. VI. PRICE DISCRIMINATION
Definition: the sale of a specific product at more than one price, and price differences are not justified by cost differences.
Conditions:
Monopoly Power: the seller must be a monopolist or at least have some monopoly power (ability to control P&Q).
Market Segregation: the seller is able to segregate buyers into distinct classes based on different demand elasticities.
No Resale: the buyer cannot resell the good or service.
Consequences:
More Profit: monopolist can gain more profits.
More Production: monopolist is willing to produce more

24. MC P
Economic profits with
a single MR=MC
price
ATC
Price and Costs D MR Q Q1

25. A perfectly discriminating producing more product
monopolist has MR=D,
producing more product
and more profit! MC P
ATC
Price and Costs
MR=D D Q Q1 Q2

26. VII. REGULATED MONOPOLY
Natural Monopolies: they are subject to rate (price) regulation.
Socially Optimum Price: if the objective is achieving allocative efficiency, the regulator should set a legal (ceiling) price equals the MC:
P = MC
Fair-Return Price: because optimum price may lead to losses, price must be set where no losses occur, that’s at ATC:
P = ATC

27. MR = MC Fair-Return Price Socially-Optimum Price
Dilemma of Regulation: Which Price? P
MR = MC
Fair-Return Price Pm
Socially-Optimum
Price
Price and Costs
ATC Pf MC Pr D MR Q Qm Qf Qr