Pure Monopoly

1. 24 C H A P T E R Pure Monopoly

2. Pure Monopoly Pure Competition Monopolistic Competition Oligopoly FOUR MARKET MODELS Pure Monopoly: • Single Seller • No Close Substitutes • Price Maker • Blocked Entry • Nonprice Competition

3. BARRIERS TO ENTRY • Economies of Scale • The Natural Monopoly Case • Legal Barriers to Entry • Patents / Licenses • Ownership or Control of Essential Resources • - Pricing and Other Strategic barriers to entry

4. MONOPOLY DEMAND • 3 Basic Assumptions: • 1. Monopoly Status is Secure • 2. No Governmental Regulation • 3. Firm Charges the Same Price for all Units Sold • Market Demand Curve is the Firm’s Demand Curve

5. The monopolist sets the price in the elastic region of demand • In the elastic regionof demand lower price leads to higher total revenue • The monopolist avoids the inelastic regionin the demand curve.

6. In competitive markets: • Demand is perfectly elastic demand • Each unit sold will add the amount of constant product price to total revenue. • P = MR(constant) • In pure monopoly: • The monopolist is the market • The demand is the market demand • The demand is downward sloping • Qd increases as P decreases

7. MONOPOLY REVENUES & COSTS Revenue Data Quantity of Output Price (Average Revenue) Marginal Revenue 0 1 2 3 4 5 6 7 8 9 10 $172 162 152 142 132 122 112 102 92 82 72 $162 142 122 102 82 62 42 22 2 - 18

8. MONOPOLY REVENUES & COSTS Revenue Data Quantity of Output Price (Average Revenue) Marginal Revenue 0 1 2 3 4 5 6 7 8 9 10 $172 162 152 142 132 122 112 102 92 82 72 Note that P > MR (except 1 unit) $162 142 122 102 82 62 42 22 2 - 18

9. $ MC D MR Q

10. $ MC MC = MR MR D MR Q* Q

11. $ MC MC = MR Pm MR Recall P>MR! D MR Q* Q

12. $ MC MC = MR Pm MR Recall P>MR! D MR Q Q*

13. Note that ATC minimum = (MR=MC) $ MC Pm ATC MR D MR Q

14. Profit maximization rule of monopolist MR = MC And MC ≠ P • Note that price > MR • Loss minimization rule MR = MC

15. The monopolist has no supply curve (MC ≠ P) • The monopolist equates MR and MC to determine output • The monopolist does not set the highest possible price. Monopolist goal is maximum profit not maximum price. • Higher price may lead to less profit.

16. 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 0 $172 $ 0 $100 - $100 = =

17. ] ] 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 0 1 0 $172 $172 162 $ 0 162 $ 0 $100 $100 190 - $100 - $100 - 28 90 $162 - x = = $190.00 MC = $190 – 100 = $90 MR = $162 – 0 = $162 MR > MC Loss Improvement from -$100 to -$28 Check next unit of output!

18. ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] 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 0 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 90 80 70 60 70 80 90 110 130 150 $162 142 122 102 82 62 42 22 2 - 18 $190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.73 97.78 103.00

19. ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] 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? 0 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 90 80 70 60 70 80 90 110 130 150 $162 142 122 102 82 62 42 22 2 - 18 $190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.73 97.78 103.00