10 Pure Monopoly McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc All rights reserved Chapter Objectives Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word Key Terms End Show 10-2 • Characteristics of Pure Monopoly • How Pure Monopoly Sets Profit Maximizing Output and Price • The Economic Effects of Monopoly • Why A Monopolist May Wish to Charge Different Prices in Different Markets Copyright 2008 The McGraw-Hill Companies Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word Key Terms FOUR MARKET MODELS Pure Monopoly: • Single Seller • No Close Substitutes • Price Maker • Blocked Entry • Nonprice Competition Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum End Show 10-3 Copyright 2008 The McGraw-Hill Companies Examples of Monopoly • Public utility companies • Natural Gas • Electric • Water • Near monopolies • Intel • Wham-O (Frisebee) • Professional Sports Teams LO1 10-4 Barriers to Entry Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word Key Terms End Show 10-5 • Economies of Scale • Legal Barriers to Entry O 10.2 – Patents – Licenses • Ownership or Control of Essential Resources • Pricing and Other Strategic Barriers to Entry Copyright 2008 The McGraw-Hill Companies Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word Key Terms Average Total Cost THE NATURAL MONOPOLY CASE $20 15 10 ATC If ATC declines over extended output, least-cost production is realized only if there is one producer - a natural monopoly 50 End Show 10-6 Copyright 2008 The McGraw-Hill Companies 100 Quantity 200 Monopoly Demand Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word Key Terms End Show 10-7 • Monopoly Status is Secure • No Governmental Regulation • Firm is a Single-Price Monopolist (No Price Discrimination) Copyright 2008 The McGraw-Hill Companies Price and Marginal Revenue Marginal Revenue is Less Than Price Characteristics Barriers to Entr • y Monopoly Dema nd Price and Margi • nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions • Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina • tion Regulated Mono poly Last Word A Monopolist is Selling Units at $142 To Sell More (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 End Show 10-8 Copyright 2008 The McGraw-Hill Companies D 102 Gain = $132 92 82 Key Terms Loss = $30 Price and Marginal Revenue Marginal Revenue is Less Than Price Characteristics Barriers to Entr • y Monopoly Dema nd Price and Margi • nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions • Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina • tion Regulated Mono poly • Last Word A Monopolist is Selling Units at $142 To Sell More (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 Key Terms End Show 10-9 $142 132 122 112 Loss = $30 D 102 Gain = $132 92 82 MR The Constructed Marginal Revenue Curve Must Always Be Less Than the Price Copyright 2008 The McGraw-Hill Companies Monopoly Revenue and Costs Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word Key Terms • Monopolist is a Price Maker (MR < P) • Sets Price in the Elastic Region • Output and Price Determination – Cost Data – MR = MC Rule • No Supply Curve End Show 10-10 Copyright 2008 The McGraw-Hill Companies G 10.1 W 10.1 Economic Effects of Monopoly Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word Price, Output, and Efficiency Pure Monopoly Purely Competitive Market S=MC MC b Pm P=MC= Minimum ATC Pc c Pc a D Qc MR Qm Qc Pure Competition is Efficient Monopoly Price is Greater Than MC And Is Therefore Inefficient Key Terms End Show 10-17 Copyright 2008 The McGraw-Hill Companies D Economic Effects of Monopoly Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word Price, Output, and Efficiency • Income Transfer • Cost Complications • Economies of Scale – Simultaneous Consumption – Network Effects Key Terms End Show 10-18 Copyright 2008 The McGraw-Hill Companies Economic Effects of Monopoly • X-Inefficiency Average Total Costs Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word O 10.3 X ATCX Average Total Cost ATC1 X’ ATCX’ ATC2 Q1 Quantity Q2 • Rent-Seeking Expenditures – Rent-Seeking Behavior • Technological Advance • Assessment and Policy Options Key Terms End Show 10-19 Copyright 2008 The McGraw-Hill Companies Economic Effects of Monopoly Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word Key Terms End Show GLOBAL PERSPECTIVE Representative Highly Competitive Foreign Multinational Corporations Company (Country) Bayer (Germany) BP Amoco (United Kingdom Michelin (France) NEC (Japan) Nestlé (Switzerland) Nokia (Finland) Royal Dutch/Shell (Netherlands) Royal Philips (Netherlands) Sony (Japan) Toyota (Japan) Unilever (Netherlands) Main Products Chemicals Gasoline Tires Computers Food Products Wireless Phones Gasoline Electronics Electronics Automobiles Food Products Source: Fortune.com 10-20 Copyright 2008 The McGraw-Hill Companies Price Discrimination Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word Key Terms End Show 10-21 • Three Forms O 10.4 – Charging Each Customer the Maximum They Are Willing to Pay – Charging Each Customer One Price For The First Set of Units Purchased and a Lower Price for Subsequent Units – Charging Some Customers One Price and a Different Price for Other Customers Copyright 2008 The McGraw-Hill Companies Price Discrimination Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word Key Terms End Show 10-22 • Conditions – Monopoly Power – Market Segregation – No Resale • Examples of Price Discrimination – Airfares – Electric Utilities – Theaters & Golf Courses Copyright 2008 The McGraw-Hill Companies W 10.1 PRICE DISCRIMINATION Price and Costs Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word P Economic profits with a single MR=MC price ATC MR Key Terms End Show 10-23 Copyright 2008 The McGraw-Hill Companies MC Q1 D Q PRICE DISCRIMINATION Price and Costs Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word P A perfectly discriminating monopolist has MR=D, producing more product and more profit! MC ATC MR=D D Key Terms End Show 10-24 Copyright 2008 The McGraw-Hill Companies Q1 Q2 Q PRICE DISCRIMINATION Economic profits with price discrimination Price and Costs Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word P MC ATC MR=D D Key Terms End Show 10-25 Copyright 2008 The McGraw-Hill Companies Q1 Q2 Q Regulated Monopoly Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word • Natural Monopolies • Rate Regulation • Socially Optimum Price P = MC • Fair Return Price P = ATC Key Terms End Show 10-26 Copyright 2008 The McGraw-Hill Companies Regulated Monopoly Monopoly Price Price and Costs (Dollars) Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word Dilemma of Regulation Pm Fair-Return Price f Pf a Pr b Qf Quantity Copyright 2008 The McGraw-Hill Companies MC D Qm End Show 10-27 ATC r MR Key Terms Socially Optimal Price Qr De Beers Diamonds Are Monopolies Forever? Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word • 66 Year Policy of Monopolizing the Diamond Trade • Mid-2000 Abandoned Monopoly Efforts • Decline in Number of Select Dealers and Cutters • Classic Monopoly Behavior – Pricing – Single-Channel Marketing Key Terms End Show 10-28 Copyright 2008 The McGraw-Hill Companies De Beers’s Diamonds • De Beers once controlled about 80% of • • the world’s diamond market Monopoly position eroded over time • New diamond discoveries • Nearly perfect artificial diamonds • Unfavorable media attention Now focus on increasing demand for diamonds rather than controlling supply 10-30 Key Terms Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word Key Terms End Show 10-31 • • • • • • • • • pure monopoly barriers to entry simultaneous consumption network effects X-inefficiency rent-seeking behavior price discrimination socially optimal price fair-return price Copyright 2008 The McGraw-Hill Companies Next Chapter Preview… Characteristics Barriers to Entr y Monopoly Dema nd Price and Margi nal Revenue Marginal Reven ue and Costs Profit Maximizat ion Misconceptions Loss Minimizati on Economic Effec ts of Monopoly Price Discrimina tion Regulated Mono poly Last Word Monopolistic Competition and Oligopoly Key Terms End Show 10-32 Copyright 2008 The McGraw-Hill Companies ... Key Terms End Show 10- 21 • Three Forms O 10. 4 – Charging Each Customer the Maximum They Are Willing to Pay – Charging Each Customer One Price For The First Set of Units Purchased and a Lower... $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 ] 103 0 $90 80 70 60 70 80 90 110 130 150 $ -100 -28 +34 +86 +128 +140... Cost Data – MR = MC Rule • No Supply Curve End Show 10- 10 Copyright 2008 The McGraw-Hill Companies G 10. 1 W 10. 1 Monopoly Revenue and Costs Characteristics Barriers to Entr y Monopoly Dema nd