1. Pure Monopoly 12 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. An Introduction to Pure Monopoly Single seller No close substitutes Price maker Blocked entry Non-price competition – mostly PR or advertising the product Examples Pure, regulated, near LO1

3. Barriers to Entry Barrier to Entry: a factor that keeps firms from entering an industry. Economies of Scale Legal Barriers: Patents and Licenses Ownership of Essential Resources Pricing LO1

4. Monopoly Demand Firm and market demand are same No governmental regulation Firm is a single-price monopolist LO1

5. Table 10.1 Revenue and Cost Data of a Pure Monopolist Revenue DataCost Data (1) Quantity of Output (2) Price (Average Revenue) (3) Total Revenue (1) X (2) ( 4) Marginal Revenue (5) Average Total Cost (6) Total Cost (1) X (5) (7) Marginal Cost (8) Profit (+) or Loss (-) 0 $ 172$0 $ 100$ -100 1 162 $ 162 $ 190.00190$ 90-28 2 152304 142 135.0027080+34 3 142426 122 113.3334070+86 4 132528 102 100.0040060+128 5 122610 82 94.0047070+140 6 112672 62 91.6755080+122 7 102714 42 91.4364090+74 8 92736 22 93.75750110-14 9 82738 2 97.78880130-142 10 72720 -18 103.001030150-310 Monopoly Demand LO1

6. Output and Price Determination LO2 Table 10.2 Steps for Graphically Determining the Profit-Maximizing Output, Profit-Maximizing Price, and Economic Profits (if Any) in Pure Monopoly Step 1 Determine the profit-maximizing output by finding where MR=MC. Step 2 Determine the profit-maximizing price by extending a vertical line upward from the output determined in step 1 to the pure monopolist’s demand curve. Step 3 Determine the pure monopolist’s economic profit by using one of two methods: Method 1. Find profit per unit by subtracting the average total cost of the profit-maximizing output from the profit-maximizing price. Then multiply the difference by the profit-maximizing output to determine economic profit (if any). Method 2. Find total cost by multiplying the average total cost of the profit-maximizing output by that output. Find total revenue by multiplying the profit-maximizing output by the profit-maximizing price. Then subtract total cost from total revenue to determine the economic profit (if any).

7. Misconceptions of Monopoly Pricing Not highest price Total profit Possibility of losses LO2

8. Economic Effects of Monopoly Income transfer Cost complications Economies of scale Simultaneous consumption Network effects X-Inefficiency Rent seeking expenditures Technological advance LO3

9. Assessment and Policy Options Antitrust laws Break up the firm Regulate it Government determines price and quantity Ignore it Let time and markets get rid of monopoly LO3

10. Price Discrimination Price discrimination Charging different buyers different prices Price differences are not based on cost differences Conditions for success: Monopoly power Market segregation No resale LO4

11. Regulated Monopoly Natural monopolies: Market demand curve intersects ATC where ATC is still declining Socially optimal price P=MC Fair return price P=ATC LO5