1. Chapter 12 Pure Monopoly Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. 12-2 Introduction to Pure Monopoly Pure monopoly Single seller – a sole producer No close substitutes – unique product Price maker – control over price Blocked entry – strong barriers to entry Non-price competition – mostly PR but can engage in advertising to increase demand LO1

3. 12-3 Barriers to Entry Barriers to entry are factors that prevent firms from entering the industry Economies of scale Legal barriers to entry like patents and licenses Ownership or control of essential resources Pricing and other strategic barriers LO2

4. 12-4 Economies of Scale 0 Average total cost Quantity 10 15 $20 50 100 200 ATC LO2

5. 12-5 Monopoly Demand The pure monopolist is the industry Monopolist demand curve is the market demand curve Demand curve is downsloping Marginal revenue is less than price LO3

6. 12-6 Monopoly Demand Marginal revenue will be less than price Monopolist is a price maker Monopolist sets price in the elastic region of the demand curve LO3

7. 12-7 Demand, Marginal Revenue, and Total Revenue $200 150 100 50 0 $750 500 250 0 24681012141618 24681012141618 Price Total revenue ElasticInelastic Total-revenue curve D MR TR LO3

8. 12-8 Output and Price Determination Steps for Graphically Determining the Profit-Maximizing Output, Profit-Maximizing Price, and Economic Profit (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).

9. 12-9 Misconceptions Concerning Monopoly Pricing Not the highest price Total profit Possibility of losses LO4

10. 12-10 Economic Effects of Monopoly Income transfer Cost complications Economies of scale Simultaneous consumption Network effects X-inefficiency Rent-seeking behavior Technological advance LO5

11. 12-11 X-Inefficiency 0 Average total costs Quantity ATC 2 ATC 1 ATC x Q1Q1 Q2Q2 Average total cost X X' ATC x' LO5

12. 12-12 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 LO5

13. 12-13 Price Discrimination Price discrimination Charging different buyers different prices Different prices are not based on cost differences Conditions for success Monopoly power Market segregation No resale LO6

14. 12-14 Graphical Analysis MC = ATC QbQb Qs Qs PsPs PbPb P P MR b MR s DbDb DsDs (a) Small businesses (b) Students Economic profit LO6

15. 12-15 Regulated Monopoly Natural monopolies Socially optimal price Set price equal to marginal cost Fair return price Set price equal to average total cost LO7

16. 12-16 Monopoly Power in the Internet Age Google dominates search Facebook dominates social media Amazon dominates as an online retailer Barriers of entry Network effects of being large attract more users Economies of scale