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Pure Monopoly
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-2
Examples of Monopoly
Public utility companies
Natural gas
Electric
Cable television
Near monopolies
Intel
Wham-O
Professional sports teams
LO
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
LO
12-4
Economies of Scale
$20
15
ATC
10
50
LO
100
200
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
LO
12-6
Monopoly Demand
Revenue and Cost Data of a Pure Monopolist
Revenue Data
(1)
Quantity
of Output
(2)
Price
(Average
Revenue)
(3)
Total
Revenue
(1) X (2)
Cost Data
(4)
Marginal
Revenue
(5)
Average
Total Cost
(6)
Total Cost
(1) X (5)
(7)
Marginal
Cost
(8)
Profit (+)
or
Loss (-)
$ 172
$0
162
162
$ 162
$ 190.00
190
$ 90
-28
152
304
142
135.00
270
80
+34
142
426
122
113.33
340
70
+86
132
528
102
100.00
400
60
+128
122
610
82
94.00
470
70
+140
112
672
62
91.67
550
80
+122
102
714
42
91.43
640
90
+74
92
736
22
93.75
750
110
-14
82
738
97.78
880
130
-142
10
72
720
-18
103.00
1030
150
-310
$ 100
$ -100
12-7
Monopoly Demand
Loss = $30
Gain = $132
LO
12-8
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
LO
12-9
Inelastic
MR
Total-revenue curve
TR
LO
12-10
Step 2
Step 3
LO2
$200
175
MC
Pm=$122
150
125
100
75
Economic
profit
ATC
D
A=$94
MR=MC
50
25
0
LO
MR
1
5 6 7
Quantity
10
12-12
Misconceptions Concerning
Monopoly Pricing
Not the highest price
Total profit
Possibility of losses
LO
12-13
Misconceptions of Monopoly
Pricing
MC
A
Pm
ATC
Loss
AVC
V
D
MR=MC
MR
0
LO
Qm
12-14
S=MC
P=MC=
Minimum
ATC
Pc
MC
Pm
Pc
b
d
a
D
Qc
(a)
Purely competitive market
LO
Qm
MR
Qc
(b)
Pure monopoly
12-15
12-16
X-Inefficiency
ATCx
ATC1
X'
ATCx'
Average
total cost
ATC2
Q1
LO
Q2
12-17
12-18
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
LO
12-19
Examples of Price
Discrimination
LO
Business travel
Electric utilities
Movie theaters
Golf courses
Railroad companies
Coupons
International trade
12-20
Graphical Analysis
Economic
profit
Pb
Economic
profit
MC = ATC
Q
b
MRb
(a) Small
businesses
LO
Ps
Qs
MC =
ATC
Ds
MRs
(b) Students
12-21
Regulated Monopoly
Natural monopolies
Socially optimal price
Set price equal to marginal cost
Fair return price
Set price equal to average total
cost
LO
12-22
Regulated Monopoly
Monopoly
price
Pm
Pf
Fair-return
price
a
Pr
r
MR
Qm
LO
Socially
optimal
price ATC
b
Qf
MC
D
Qr
12-23