Transcript Pure Monopoly - MCNEIL ECONOMICS

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Pure Monopoly
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
An Introduction to Pure Monopoly
• Single seller—a sole producer
• No close substitutes—unique product
• Price maker—control over price
• Blocked entry—strong barriers to
•
LO1
entry block potential competition
Nonprice competition—mostly PR or
advertising the product
8-2
Examples of Monopoly
• Public utility companies
• Natural gas
• Electric
• Water
• Near monopolies
• Intel
• Wham-O
• Professional sports teams
LO1
8-3
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
8-4
Monopoly Demand
• The pure monopolist is the industry
• The demand curve is the market
•
LO1
demand curve
• Downsloping demand curve
Marginal revenue is less than price
8-5
Monopoly Demand
Revenue and Cost Data of a Pure Monopolist
Revenue Data
Cost Data
(1)
Quantity
of Output
(2)
Price
(Average
Revenue)
(3)
Total
Revenue
(1) X (2)
0
$ 172
$0
1
162
162
$ 162
$ 190.00
190
$ 90
-28
2
152
304
142
135.00
270
80
+34
3
142
426
122
113.33
340
70
+86
4
132
528
102
100.00
400
60
+128
5
122
610
82
94.00
470
70
+140
6
112
672
62
91.67
550
80
+122
7
102
714
42
91.43
640
90
+74
8
92
736
22
93.75
750
110
-14
9
82
738
2
97.78
880
130
-142
10
72
720
-18
103.00
1030
150
-310
LO2
(4)
Marginal
Revenue
(5)
Average
Total
Cost
(6)
Total
Cost
(1) X (5)
(7)
Marginal
Cost
$ 100
(8)
Profit (+)
or
Loss (-)
$ -100
8-6
Monopoly Demand
• All customers must pay the same price
$142
132
122
112
102
Loss = $30
D
Gain = $132
92
82
0
LO2
1
2
3
4
5
6
8-7
Output and Price Determination
$200
Price
150
100
MR
50
D
0
2
4
6
8
10
12
14
16
18
Quantity
LO2
8-8
Monopoly Demand
• Marginal revenue < Price
• Monopolist is a price maker
• Monopolist sets prices in elastic
region of demand curve
LO2
8-9
Output and Price Determination
Price, Costs, and Revenue
$200
175
Pm=$122
MC
150
125
100
75
Economic
Profit
ATC
D
A=$94
MR=MC
50
25
0
LO2
MR
1
2
3
4
5
6
Quantity
7
8
9
10
8-10
Misconceptions of Monopoly Pricing
• Not highest price
• Total profit
• Possibility of losses
LO2
8-11
Economic Effects of Monopoly
Pure competition is efficient
Monopoly is inefficient
S=MC
MC
Pm
P=MC=
Minimum
ATC
Pc
Pc
b
d
c
a
D
D
MR
LO3
Qc
Qm Qc
(a)
(b)
Purely competitive market
Pure monopoly
8-12
Economic Effects of Monopoly
• Income transfer
• Cost complications
• Economies of scale
• X-inefficiency
• Rent-seeking expenditures
• Technological advance
LO3
8-13
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
8-14
Examples of Price Discrimination
• Business travel
• Electric utilities
• Movie theaters
• Golf courses
• Railroad companies
• Coupons
• International trade
LO4
8-15
Graphical Analysis
P
P
Economic
profit
Pb
Economic
profit
Ps
MC = ATC
MC = ATC
Ds
Qb
MRb
Db
(a) Small businesses
LO4
Qs
MRs
(b) Students
8-16
Monopoly and Antitrust Policy
• Antitrust laws
• Break up the firm
• Regulate it
• Government determines price and
•
LO5
quantity
Ignore it
• Let time and markets get rid of
monopoly
8-17
Global Perspective
Competition from Foreign Multinational Corporations
LO5
8-18