micro economics chapter 12

12 Pure Monopoly McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc All rights reserved An Introduction to Pure Monopoly • Single seller • No close substitutes • Price maker • Blocked entry • Non-price competition – mostly PR or • LO1 advertising the product Examples • Pure, regulated, near Barriers to Entry • Barrier to Entry: a factor that keeps firms from entering an industry • Economies of Scale • Legal Barriers: Patents and Licenses • Ownership of Essential Resources • Pricing LO1 Monopoly Demand • Firm and market demand are same • No governmental regulation • Firm is a single-price monopolist LO1 Monopoly Demand Table 10.1 Revenue and Cost Data of a Pure Monopolist Revenue Data (1) Quantity of Output LO1 Cost Data (2) Price (Average Revenue) (3) Total Revenue (1) X (2) $ 172 $0 162 162 152 304 142 142 426 132 (4) Marginal Revenue (5) Average Total Cost (6) Total Cost (1) X (5) (7) Marginal Cost $ 100 $ 162 $ 190.00 (8) Profit (+) or Loss (-) $ -100 190 $ 90 -28 135.00 270 80 +34 122 113.33 340 70 +86 528 102 100.00 400 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 Output and Price Determination Table 10.2 Steps for Graphically Determining the Profit-Maximizing Output, Profit-Maximizing Price, and Economic Profits (if Any) in Pure Monopoly Step Determine the profit-maximizing output by finding where MR=MC Step Determine the profit-maximizing price by extending a vertical line upward from the output determined in step to the pure monopolist’s demand curve Step Determine the pure monopolist’s economic profit by using one of two methods: Method 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 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) LO2 Misconceptions of Monopoly Pricing • Not highest price • Total profit • Possibility of losses LO2 Economic Effects of Monopoly • Income transfer • Cost complications • Economies of scale • Simultaneous consumption • Network effects • X-Inefficiency • Rent seeking expenditures • Technological advance LO3 Assessment and Policy Options • Antitrust laws • Break up the firm • Regulate it • Government determines price and • LO3 quantity Ignore it • Let time and markets get rid of monopoly Price Discrimination • Price discrimination • Charging different buyers different • LO4 prices • Price differences are not based on cost differences Conditions for success: • Monopoly power • Market segregation • No resale Regulated Monopoly • Natural monopolies: Market demand • • LO5 curve intersects ATC where ATC is still declining Socially optimal price • P=MC Fair return price • P=ATC ... Loss (-) $ -100 190 $ 90 -28 135.00 270 80 +34 122 113.33 340 70 +86 528 102 100.00 400 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