Chapter 12. Pure Monopoly

Chapter 12Pure MonopolyCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Introduction to Pure MonopolyPure monopolySingle seller – a sole producerNo close substitutes – unique productPrice maker – control over priceBlocked entry – strong barriers to entryNon-price competition – mostly PR but can engage in advertising to increase demandLO1Barriers to EntryBarriers to entry are factors that prevent firms from entering the industryEconomies of scaleLegal barriers to entry like patents and licensesOwnership or control of essential resourcesPricing and other strategic barriersLO2Economies of Scale1015$2050100200ATCLO2Monopoly DemandThe pure monopolist is the industryMonopolist demand curve is the market demand curveDemand curve is downslopingMarginal revenue is less than priceLO3Monopoly DemandMarginal revenue will be less than priceMonopolist is a price makerMonopolist sets price in the elastic region of the demand curveLO3Demand, Marginal Revenue, and Total RevenueElasticInelasticTotal-revenue curveDMRTRLO3Output and Price DeterminationLO2Steps for Graphically Determining the Profit-Maximizing Output, Profit-Maximizing Price, and Economic Profit (if Any) in Pure MonopolyStep 1Determine the profit-maximizing output by finding where MR=MC.Step 2Determine 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 3Determine 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).Misconceptions Concerning Monopoly PricingNot the highest priceTotal profitPossibility of lossesLO4Economic Effects of MonopolyIncome transferCost complicationsEconomies of scaleSimultaneous consumptionNetwork effectsX-inefficiencyRent-seeking behaviorTechnological advanceLO5X-InefficiencyATC2ATC1ATCxQ1Q2Averagetotal costXX'ATCx'LO5Assessment and Policy OptionsAntitrust lawsBreak up the firmRegulate itGovernment determines price and quantityIgnore itLet time and markets get rid of monopolyLO5Price DiscriminationPrice discriminationCharging different buyers different pricesDifferent prices are not based on cost differencesConditions for successMonopoly powerMarket segregationNo resaleLO6Graphical AnalysisMC = ATCMC = ATCQb QsPsPb PPMRbMRsDbDs(a) Small businesses(b) StudentsEconomic profitEconomic profitLO6Regulated MonopolyNatural monopoliesSocially optimal priceSet price equal to marginal costFair return priceSet price equal to average total costLO7Monopoly Power in the Internet AgeGoogle dominates searchFacebook dominates social mediaAmazon dominates as an online retailerBarriers of entry Network effects of being large attract more usersEconomies of scale