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Understanding Pure Monopoly and Its Effects

This chapter introduces the concept of pure monopoly, where there is a single seller with no close substitutes. The monopolist has control over price and faces strong barriers to entry. Examples of monopolies and the barriers to entry are discussed, along with the concept of economies of scale. The demand curve, pricing, costs, and revenue determination in a monopoly are explained, and the inefficiency and economic effects of monopoly are explored. The options for assessing and regulating monopolies are discussed, along with the concept of price discrimination. The chapter concludes with an examination of regulated monopolies and personalized pricing on the internet.

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Understanding Pure Monopoly and Its Effects

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  1. Chapter 12 Pure Monopoly

  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. Examples of Monopoly • Public utility companies • Natural gas • Electric • Cable television • Near monopolies • Intel • Wham-O • Professional sports teams LO1

  4. 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

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

  6. 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

  7. Monopoly Demand Schedule LO3

  8. $142 132 122 112 102 92 82 1 2 3 4 5 6 0 Monopoly Demand Curve Loss = $30 D Gain = $132 LO3

  9. Monopoly Demand Continued • Marginal revenue will be less than price • Monopolist is a price maker • Monopolist sets price in the elastic region of the demand curve LO3

  10. $200 150 Price 100 50 0 2 2 4 4 6 6 8 8 10 10 12 12 14 14 16 16 18 18 $750 500 Total revenue 250 0 Demand, Marginal Revenue, and Total Revenue Elastic Inelastic D MR Total-revenue curve TR LO3

  11. $200 175 150 125 100 Price, costs, and revenue 75 50 25 1 2 3 4 5 6 7 8 9 10 Quantity Output and Price Determination MC Pm=$122 Economic profit ATC D A=$94 MR=MC MR 0 LO4

  12. Output and Price Determination Steps LO4

  13. Misconceptions Concerning Monopoly Pricing • Not the highest price • Total profit • Possibility of losses LO4

  14. Price, costs, and revenue Quantity Misconceptions of Monopoly Pricing MC ATC A Loss Pm AVC V D MR=MC MR 0 Qm LO4

  15. Inefficiency of Pure Monopoly S = MC MC b Pm P = MC = Minimum ATC d c Pc Pc a D D MR Qc Qm Qc (a) Purely competitive market (b) Pure monopoly LO5

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

  17. Average total costs 0 Quantity X-Inefficiency X ATCx ATC1 X' ATCx' Average total cost ATC2 Q1 Q2 LO5

  18. 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

  19. Global Perspective LO5

  20. 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

  21. Examples of Price Discrimination • Business travel • Electric utilities • Movie theaters • Golf courses • Railroad companies • Coupons • International trade LO6

  22. Graphical Analysis P P Economic profit Economic profit Pb Ps MC = ATC MC = ATC Ds Qs Qb Db MRs MRb (b) Students (a) Small businesses LO6

  23. Regulated Monopoly • Natural monopolies • Socially optimal price • Set price equal to marginal cost • Fair return price • Set price equal to average total cost LO7

  24. Price and costs (dollars) 0 Quantity Regulated Monopoly Continued Monopoly price Pm Fair-return price Socially optimal price a f Pf ATC Pr r MC D MR b Qm Qf Qr LO7

  25. Personalized Pricing on the Internet • “Big Data” available to Internet retailers • Ability to set a price according to consumer’s perceived ability to pay • Based on your online buying habits, backgrounds, and preferences • Low price for those with elastic demand • Higher price for those with inelastic demand • Personalized pricing strategy can fail when consumers comparison shop

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