Chapter 10

Pure Monopoly

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives
Characteristics of pure monopoly Profit-maximizing output and price Economic effects of monopoly Charging different prices in different markets
10-2

Characteristics of Monopoly
Single seller No close substitutes Price maker Blocked entry Nonprice competition

10-3

Barriers to Entry
Economies of scale Legal barriers to entry
Patents Licenses

Ownership or control of essential resources Pricing and other strategic barriers to entry
10-4

Monopoly Demand
Assumptions:
Monopoly status is secure No government regulation Single-price monopolist

Face down-sloping demand

Entire market demand
10-5

Price and Marginal Revenue

Marginal revenue is less than price
A monopolist is selling 3 units at $142 To sell 4, price must be lowered to $132 All customers must pay the same price TR increases $132 minus $30 (3x$10)
$142 132 122 112 102 92 82

Loss = $30 Gain = $132

10-6

Price and Marginal Revenue

Marginal revenue is less than price
A monopolist is selling 3 units at $142 To sell 4, price must be lowered to $132 All customers must pay the same price TR increases $132 minus $30 (3x$10) $102 becomes a point on the MR curve Try other prices to determine other MR points
$142 132 122 112 102 92 82

Loss = $30 Gain = $132

MR
0 1 2 3 4 5 6

The Constructed Marginal Revenue Curve Must Always Be Less Than the Price

10-7

Down-Sloping Demand
Marginal revenue < price
To increase sales, must lower price

Firm is a price maker

Choose P,Q combination

Operate in the elastic region

Marginal revenue > 0 Total-revenue test (recall)
10-8

Profit Maximization
Output-price determination
Marginal revenue marginal cost rule Same cost definitions

No supply curve

10-9

Monopoly Revenue and Costs

Revenue Data
(2) Price (1) Quantity (Average Of Output Revenue) (3) Total Revenue (1) X (2) (4) Marginal Revenue

Cost Data
(5) (6) (7) (8) Average Total Cost Marginal Profit (+) Total Cost (1) X (5) Cost or Loss (-)

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

$162 142 122 102 82 62 42 22 2 -18

$190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.75 97.78 103.00

$100 ] 190 ] 270 ] 340 ] 400 ] 470 ] 550 ] 640 ] 750 ] 880 ] 1030

$90 80 70 60 70 80 90 110 130 150

$-100 -28 +34 +86 +128 +140 +122 +74 -14 -142 -310

Can you See Profit Maximization?

10-10

Monopoly Revenue and Costs

$200 150

Demand and Marginal-Revenue Curves Elastic Inelastic

Price

100 50

D MR
0 $750 2 4

Total-Revenue Curve

10

12

14

16

18

Total Revenue

500

250

TR
2 4 6 8 10 12 14 16 18
10-11

Profit Maximization
$200

Price, Costs, and Revenue

175

MC
150 Pm=$122 125 100 75 50 25 Economic Profit

ATC

A=$94

D MR=MC

MR
1 2 3 4 5 6 7 8 9 10

Quantity
10-12

Misconceptions
Not the highest price Total, not unit, profit Possibility of losses

10-13

Loss Minimization
Price, Costs, and Revenue MC ATC
Loss

A Pm

AVC
V

D MR=MC MR
0 Qm

Quantity
10-14

Economic Effects
Purely Competitive Market
S=MC
Pm Pc P=MC= Minimum ATC Pc a b c

Pure Monopoly

MC

D MR
Qc Qm Qc

Pure competition is efficient Monopoly is inefficient

10-15

Economic Effects
Pure competition is efficient
Productive efficiency Allocative efficiency

Monopoly is inefficient
Charge P>MC

Income transfer

10-16

Cost Complications
Economies of scale
Simultaneous consumption Network effects

X-inefficiency
Lowest ATC not achieved

Rent seeking behavior Technological advance

More likely with monopoly?
10-17

Policy Options
Use antitrust laws
Divide the firm

Natural monopoly
Regulate price

Ignore
Unstable in long run
10-18