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Chapter 10 - Pure monopoly. In this chapter, students will be able to understand: List the characteristics of pure monopoly, explain how a pure monopoly sets its profit-maximizing output and price, discuss the economic effects of monopoly, describe why a monopolist might prefer to charge different prices in different markets, distinguish between the monopoly price, the socially optimal price, and the fair-return price of a government-regulated monopoly.
Chapter 10 Pure Monopoly McGrawưHill/Irwin Copyrightâ2009byTheMcGrawưHillCompanies,Inc.Allrightsreserved 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 Examples of Monopoly • Regulated or natural monopolies – electricity • Near monopolies – Western Union – Frisbee – De Beers • Geographic monopolies – Professional sport teams • Dual objectives of study 10-4 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 10-5 Monopoly Demand • Assumptions: – Monopoly status is secure – No government regulation – Single-price monopolist • Face down-sloping demand – Entire market demand 10-6 Price and Marginal Revenue Marginal revenue is less than price • A monopolist is selling 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 Loss = $30 D 102 Gain = $132 92 82 10-7 Price and Marginal Revenue Marginal revenue is less than price • A monopolist is selling 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 Loss = $30 D 102 Gain = $132 92 82 MR The Constructed Marginal Revenue Curve Must Always Be Less Than the Price 10-8 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 > – Total-revenue test (recall) 10-9 Profit Maximization • Output-price determination – Marginal revenue marginal cost rule – Same cost definitions • No supply curve 10-10 Monopoly Revenue and Costs $200 Demand and Marginal-Revenue Curves Elastic Inelastic Price 150 100 50 $750 Total Revenue D MR 10 12 Total-Revenue Curve 14 16 18 500 250 TR 10 12 14 16 18 10-12 Profit Maximization Price, Costs, and Revenue $200 175 MC 150 125 100 75 Pm=$122 Economic Profit ATC D A=$94 MR=MC 50 25 MR 10 Quantity 10-13 Misconceptions • Not the highest price • Total, not unit, profit • Possibility of losses 10-14 Price, Costs, and Revenue Loss Minimization MC A Pm ATC Loss AVC V D MR=MC MR Qm Quantity 10-15 Economic Effects Pure Monopoly Purely Competitive Market S=MC MC b Pm P=MC= Minimum ATC Pc c Pc a D Qc MR Qm D Qc Pure competition is efficient Monopoly is inefficient 10-16 Economic Effects • Pure competition is efficient – Productive efficiency – Allocative efficiency – CS+PS maximized • Monopoly is inefficient – Charge P>MC – Deadweight loss • Income transfer 10-17 Cost Complications • Economies of scale – Simultaneous consumption – Network effects • X-inefficiency – Lowest ATC not achieved • Rent seeking behavior • Technological advance – More likely with monopoly? 10-18 Policy Options • Use antitrust laws – Divide the firm • Natural monopoly – Regulate price • Ignore – Unstable in long run 10-19 Price Discrimination • Three forms – Charge each customer max willingness to pay – Charge one price for first unit and a lower price for subsequent units – Charge different customers different prices 10-20 Price Discrimination • Conditions – Monopoly power – Market segregation – No resale • Examples – Airfares – Electric utilities – Theaters & golf courses 10-21 Regulated Monopoly • Natural monopolies • Rate regulation • Socially optimum price P = MC • Fair return price P = ATC 10-22 Regulated Monopoly Dilemma of Regulation Price and Costs (Dollars) Monopoly Price Pm Fair-Return Price f Pf a Pr ATC r MC D MR Socially Optimal Price b Qm Qf Qr Quantity 10-23 De Beers Diamonds • 66 years of monopoly pricing – Independent producers went along • Mid-2000 abandoned monopoly – New discoveries – Independent producers withdrew – Political considerations • New strategy – “The diamond supplier of choice” 10-24 Key Terms • • • • • • • • • pure monopoly barriers to entry simultaneous consumption network effects X-inefficiency rent-seeking behavior price discrimination socially optimal price fair-return price 10-25 Next Chapter Preview… Monopolistic Competition and Oligopoly 10-26 ... -1 4 -1 42 - 310 Can you See Profit Maximization? 1 0- 11 Monopoly Revenue and Costs $200 Demand and Marginal-Revenue Curves Elastic Inelastic Price 150 100 50 $750 Total Revenue D MR 10 12 Total-Revenue... or Loss (-) $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 $ -1 00 -2 8 +34... network effects X-inefficiency rent-seeking behavior price discrimination socially optimal price fair-return price 1 0- 25 Next Chapter Preview… Monopolistic Competition and Oligopoly 1 0- 26