Powerpoint Chapter 11 - Pure Monopoly

Pure Monopoly

• Single seller — A sole producer

• No close substitutes — Unique product

• Price maker — Control over price

• Blocked entry — Strong barriers to entry

• Non-price competition — Mostly PR but can engage in advertising to increase demand

Examples of Monopoly

• Public utility companies

• Near monopolies (Ex: Intel)

• Professional sports teams

Barriers to Entry

Factors that prevent firms from entering the industry

Examples of Barriers to Entry

• Economies of scale

• Legal barriers to entry like patents and licenses

• Ownership or control of essential resources

• Pricing and other strategic barriers

Monopoly Demand

• The pure monopolist is the industry

• Monopolist demand curve is the market demand curve

• Demand curve is downsloping

• Marginal revenue is less than price

• Marginal revenue will be less than price

• Monopolist is a price maker

• Monopolist sets price in the elastic region of the demand curve

Steps for Graphically Determining the Profit-Maximizing Output, Profit-Maximizing Price, and Economic Profit (If any) in Pure Monopoly

1. Determine the profit-maximizing output by finding where MR = MC.

2. Determine the profit-maximizing price by extending a vertical line upward from the output determined in Step 1 to the pure monopolist’s demand curve.

3. Determine the pure monopolist’s economic profit by using one of two methods:

   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).

   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 Pricing

• Not the highest price

• Total profit

• Possibility of losses

Economic Effects of Monopoly

• Income transfer

• Cost complications

Examples of Cost Complications

• Economies of Scale

• Simultaneous Consumption

• Network Effects

• X-Inefficiency

• Rent-Seeking Behavior

• Technological Advance

Assessment and Policy Options

• Antitrust Laws - Break up the firm

• Regulate It - Government determines price and quantity

• Ignore It - Let time and markets get rid of monopoly

Price Discrimination

• Charging different buyers different prices

• Different prices are not based on cost differences

Conditions for Successful Price Discrimination

• Monopoly power

• Market segregation

• No resale

Examples of Price Discrimination

• Business travel

• Electric utilities

• Movie theaters

• Golf courses

• Railroad companies

• Coupons

• International trade

Socially Optimal Price

Set price equal to marginal cost.

Fair Return Price

Set price equal to average total cost.

Personalized Pricing on the Internet

• “Big Data” available to Internet retailers

• Ability to set a price according to consumer’s perceived ability to pay

• Based on online buying habits, backgrounds, and preferences

• Low price for those with elastic demand

• Higher price for those with inelastic demand

• Personalized pricing strategy can fail when consumers comparison shop