1. Pure Monopoly
Mr. Bammel

2. Characteristics Single firm is the sole producer
The product sold is unique and therefore has no close substitutes;
Control over total quantity supplied and thus is a “price maker”
Blocked entry due to economic, technological, legal, or some other barrier;
Nonprice Competition, using other aspects of the product besides price to drive in the buyers;

3. Examples of Monopolies
Majority are government-regulated public utilities – natural gas, electric, water, cable TV, local telephone, etc.
Some companies are “near-monopolies” in which one firm controls the bulk of sales;
Wham-O (throwing disks)
De Beers (rough-cut diamonds)
*either way, there is almost always some competition.

4. Barriers to Entry
Factors in the industry which block all potential competition; in a Pure Monopoly, there is complete blocked entry;
Four prominent barriers:
Economies of Scale
Legal Barriers to Entry
Ownership or Control of Essential Resources
Pricing and other Strategic Barriers to Entry

5. Economies of Scale
Reminder: As plant size increases, a number of factors will for a time lead to lower average costs of production;
When dealing with a monopoly, when the long-run ATC is declining, only a single producer can produce any particular output at minimum total cost;
If a small industry tries to enter the market, because of economies of scale of the large industry, the small industry will be undercut because the larger industry can produce at a lower cost and therefore a lower price; the small industry still must charge a higher price to make a profit;

6. Economies of Scale
A smaller firm entering the industry does not experience the economies of scale based off the output they produce; they must charge a higher price to make a profit;
A larger firm can produce a larger output at a lower cost and therefore make a profit on a lower price;

7. Legal Barriers to Entry
Patents: exclusive right of an inventor to use, or to allow another to use, his or her invention;
Government seeks to protect the inventor from rivals who mean to take their design and make a profit;
Self sustaining patents is when a firm uses their own patent to continue to further strengthen the patent through more research and gain a market position;

8. Ownership or Control of Essential Resources
Use private property as an obstacle to potential rivals;
Owning a resource essential in the production of a product and not allowing rivals to purchase that resource;

9. Pricing and Other Strategic Barriers to Entry
Monopolist creating their own barriers: reducing the price, increasing advertising, etc.
Monopolist can be very creative in the barrier process;

10. Monopoly Demand
Since the pure monopolist is the industry, its demand curve will also represent the market demand curve; and is Down-sloping;
B/C of the down-sloping line, the monopolist can only increase the sales/output by decreasing the price; so this means that for every price, except the first, Marginal Revenue will be below the Demand curve;

11. Marginal Revenue below Price
The lower price successively charged will now apply to all prior units sold;
So you lose money in the price but you gain money in the total output produced with the new price;
Each new unit sold increases total revenue by an amount equal to its own price less the sum of the price cuts that apply to all prior units of output;
Thus, MR < P at every possible unit except the first;
While TR increases, MR is positive;
While TR decreases, MR is negative;

13. The Monopolist is the Price Maker
Firms with a down-sloping line are price makers; most evident in a pure monopoly;
So when a monopolist determines output to produce, they determine the price as well based off the demand line;

14. Setting price at the Elastic Region of Demand
TR test
when demand is elastic, a decrease in price will increase TR;
When demand is inelastic, a decrease in price will decrease TR;
*a monopolist will never choose a price-quantity combination where a price reduction will cause a loss in TR;
The lower TR and Higher Cost of increase output will lead monopolist to produce in the elastic region;

15. Profit Maximization of Pure Monopoly

16. Maximize Total Profits
Same rationale as a profit seeking competitive industry: MR = MC;
The price charged will be the price on the demand line matching up with the quantity of MR = MC;
Note: can still also use the Total Revenue vs Total Cost approach.

17. Pure Monopolist is without a Supply Curve
No unique relationship of price and quantity supplied because a monopolist merely finds the profit maximizing price;
The profits are dependent on the quantity demanded/price associated with the output of the point where MR = MC;

18. Misconceptions of Monopoly
Not Highest Price: finding highest profits;
Total, Not Unit, Profit: max total profits, not max unit profits; the extra units sold at lower price may generate a higher total profit than the high unit profit;

19. Partner up: Without using the Textbook
Draw what a loss minimizing position would look like on a graph.
If a monopolist was in profit maximizing position, what would be the factors that could bring the monopolist into a loss?

20. Reminder of Pure Competition

21. Efficiency
In Monopoly, does society achieve productive and allocative efficiency?
Why not? Reminder:
Productive efficiency is P = Minimum ATC
Allocative efficiency is P = MC

22. Deadweight Loss
Because of the efficiency loss of a monopoly, some units that should have been produced are not and the resources are directed elsewhere;
The total dollar value of the efficiency loss/deadweight loss is equal to the dollar value of the triangle created by demand, MC and MR;

23. Efficiency Loss of Monopoly

24. Income Transfer
Basically a monopolist levies a “private tax” on the consumer, which then ends up in the hands of the owners of the monopoly;
Income transferred is equal to the difference between price equilibrium and price charged by a monopolist multiplied by the units sold;

25. Cost Complications
There are 4 reasons why cost may be larger or smaller than pure competition:
Economies of Scale
X-Inefficiency
Rent-Seeking Expenditures
Technological Advancement

26. Examining Cost Get back with a partner:
One of you read about economies of scale and Technological Advancement
The Second needs to read about X-Inefficiency and Rent-Seeking Expenditures
Talk with each other and help fill in the notes for each of the 4 cost complications for a Monopoly.

27. Price Discrimination
The practice of selling a specific product at more than one price when the price differences are not justified by cost differences;
Possible under three conditions:
Monopoly power: ability to control price and output;
Market Segregation: ability to segregate buyers into distinct classes;
No Resale: unable to resale item if part of class buying for lower price;

28. Regulated Monopoly
Being subject to rate (price) regulation;

29. Partner 1: read and interpret the graph associated with Price Discrimination on page 479. Be sure to understand how more profits and production is displayed and created through price discrimination;
Partner 2: Read and interpret the graph associated with a regulated monopoly on page 480. Be sure to understand the differences between a “socially optimal price” and a “fair-return price.” How will each of these appear graphically?