Chapter 12: Pure Monopoly

Introduction to Pure Monopoly

• A pure monopoly is characterized by a single seller who is the sole producer of a product with no close substitutes.

• Key characteristics include:

  • Price Maker: Monopolists have control over the price of their product.

  • Blocked Entry: There are significant barriers to entry that prevent other firms from entering the market.

  • Non-Price Competition: Monopoly firms might engage in advertising to enhance demand but rely primarily on their unique product offering.

Examples of Monopoly

• Public Utility Companies: Such as natural gas, electricity, and cable television services.

• Near Monopolies: Companies like Intel and Android that dominate specific markets.

• Professional Sports Teams: Typically have a local monopoly on their fan base.

Barriers to Entry

• Barriers that prevent entry into a monopoly include:

  • Economies of Scale: Larger firms can produce at a lower average cost, discouraging new entrants.

  • Legal Barriers: Patents or licenses that protect products or services.

  • Ownership of Essential Resources: Control over important resources necessary for the industry.

  • Pricing Barriers: Established monopolists can use pricing strategies to undercut potential entrants.

Monopoly Demand

• The monopolist's demand curve is equivalent to the market demand curve, which is typically downward sloping.

• Marginal Revenue (MR) for a monopolist is always less than the price due to the need to lower prices on all units sold to sell additional units.

Revenue and Cost in Monopoly

• Revenue data for a monopolist includes:

  • Price (Average Revenue) and Total Revenue calculated as Quantity multiplied by Price.

  • The Marginal Revenue can be derived from the change in total revenue with each additional unit sold.

• Average Total Cost (ATC) and Marginal Cost (MC) are also important metrics to analyze profitability.

Profit Maximization in Monopoly

• Steps to determine profit-maximizing output and price:

  1. Find where MR = MC for profit-maximizing output.

  2. Extend a vertical line from this output to the demand curve to find the profit-maximizing price.

  3. Calculate economic profit by finding total revenue minus total cost, or find profit per unit and multiply by output.

• Misconceptions: Monopolists do not always charge the highest price; they focus on maximizing total profit rather than unit profit.

Inefficiency of Monopoly

• Pure monopolies tend to be less efficient than competitive markets due to:

  • Higher Prices and Lower Output compared to perfectly competitive markets.

  • Deadweight Loss: Represents lost efficiency in the market (consumers and producers surplus).

Economic Effects of Monopoly

• Monopolies can lead to:

  • Income Transfer: Shifting wealth from consumers to producers.

  • Cost Complications: Including X-inefficiency and rent-seeking behavior.

  • Impact on technological advances and network effects.

Price Discrimination

• This occurs when a monopoly charges different prices to different customers based on their willingness to pay.

• Conditions for success:

  • Monopoly power to set prices.

  • Ability to segregate markets to avoid resale.

• Common examples include business travel, movie theaters, and railroad companies.

Regulated Monopoly

• Natural monopolies are often regulated since they provide essential services with economies of scale.

• Two pricing strategies for regulated monopolies:

  • Socially Optimal Price: Set at marginal cost.

  • Fair Return Price: Set at average total cost, ensuring the monopolist can cover costs and earn a fair return.

Conclusion: Personalized Pricing

• The emergence of “Big Data” in online shopping enables retailers to tailor prices based on individual consumer preferences and purchasing behaviors.

• This results in lower prices for consumers with elastic demand and higher prices for those with inelastic demand, but can fail if consumers comparison shop.

Remember: The study of pure monopolies combines economic principles with practical considerations about market behavior, consumer interaction, and regulatory impacts.