Lecture Notes Chapter 11: Pure Monopoly

Pure Monopoly

A market structure where a single firm is the sole producer of a product for which there are no close substitutes.

Characteristics of Pure Monopoly

1. Single seller; 2. No close substitutes; 3. Price maker; 4. Blocked entry; 5. Possible nonprice competition.

Difference between Pure Monopoly and Near Monopoly

Pure monopoly has no close substitutes, while near monopoly has products with limited competition.

Barriers to Entry

Obstacles that prevent new competitors from easily entering an industry or area of business.

Examples of Barriers to Entry

1. Economies of scale; 2. Legal barriers (patents, licenses); 3. Control of essential resources; 4. Strategic barriers (selective price-cutting).

Demand Curve in Pure Monopoly

The demand curve is downward sloping, indicating that higher prices lead to lower quantities demanded.

Marginal Revenue in Monopoly

Marginal revenue is less than price due to the necessity of lowering prices on all units sold to sell an additional unit.

Profit-Maximizing Output Level in Monopoly

The output level at which marginal revenue equals marginal cost (MR=MC).

Conditions for Price Discrimination

1. Monopoly power; 2. Ability to segregate the market; 3. Buyers cannot resell.

Higher Profits in Discriminating Monopoly

Discriminating monopolies can charge different prices based on willingness to pay, increasing total revenue.

Pricing Strategies for Monopoly Regulation

1. Socially optimal pricing; 2. Fair-return pricing.

Dilemma for Regulators

Regulators must choose between setting prices at marginal cost (efficient but potentially loss-making) or average cost (providing fair return but not efficient).

Natural Monopoly

A market where a single firm can supply the entire market demand at a lower cost than multiple firms.

Technological Progress in Monopoly

Can occur, but is inconsistent; some monopolies lack incentive for innovation.

Deadweight Loss

Lost economic efficiency due to reduced production in monopolies.

Adaptive Pricing

Adjusting prices based on customer data and demand elasticity.

Price Discrimination Example: Airlines

Airlines charge different prices based on the type of traveler (business vs vacation).

Public Utility as a Monopolistic Example

Gas, electric, and water services often operate as natural monopolies regulated by governments.

Subsidies in Regulation

Financial support given by the government to keep monopolies from incurring losses.

Personalized Pricing Limitations

Challenges in identifying customers' willingness to pay and existing competitive pressures.

Regulated Monopoly

A natural monopoly regulated by the government to control prices and ensure fair returns.

Socially Optimal Price

Price equal to marginal cost, achieving allocative efficiency.

Normal Profit in Monopoly

A situation where total revenues equal total costs, leading to zero economic profit.

Productive Efficiency in Competition

Achieved when firms produce output at the lowest average total cost, not typically seen in monopolies.