Transcript Chapter 12
Chapter 12 Pure Monopoly Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Introduction to 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 LO1 12-2 Examples of Monopoly • Public utility companies • Natural gas • Electric • Cable television • Near monopolies • Intel • Wham-O • Professional sports teams LO1 12-3 Barriers to Entry • Barriers to entry are factors that prevent firms from entering the industry • Economies of scale • Legal barriers to entry like patents and licenses • Ownership or control of essential resources • Pricing and other strategic barriers LO2 12-4 Economies of Scale Average total cost $20 15 0 LO2 ATC 10 50 100 Quantity 200 12-5 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 LO3 12-6 Monopoly Demand Revenue and Cost Data of a Pure Monopolist Revenue Data (1) Quantity of Output (2) Price (Average Revenue) Cost Data (3) Total Revenue (1) X (2) (4) Marginal Revenue (5) Average Total Cost (6) Total Cost (1) X (5) (7) Marginal Cost $ 100 (8) Profit (+) or Loss (-) 0 $ 172 $0 $ -100 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 12-7 Monopoly Demand $142 132 122 Loss = $30 112 102 D Gain = $132 92 82 0 LO3 1 2 3 4 5 6 12-8 Monopoly Demand • Marginal revenue will be less than price • Monopolist is a price maker • Monopolist sets price in the elastic region of the demand curve LO3 12-9 Demand, Marginal Revenue, and Total Revenue Elastic $200 Inelastic Price 150 100 50 D MR 0 2 4 Total revenue $750 6 8 10 12 Total-revenue curve 14 16 18 500 250 TR 0 LO3 2 4 6 8 10 12 14 16 18 12-10 Output and Price Determination Steps for Graphically Determining the Profit-Maximizing Output, Profit-Maximizing Price, and Economic Profit (if Any) in Pure Monopoly Step 1 Determine the profit-maximizing output by finding where MR=MC. Step 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. Step 3 Determine the pure monopolist’s economic profit by using one of two methods: Method 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). Method 2. Find total cost by multiplying the average total cost of the profitmaximizing 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). 12-11 LO2 Output and Price Determination $200 Price, costs, and revenue 175 MC Pm=$122 150 125 100 75 Economic profit ATC D A=$94 MR=MC 50 25 0 LO4 MR 1 2 3 4 5 6 Quantity 7 8 9 10 12-12 Misconceptions Concerning Monopoly Pricing • Not the highest price • Total profit • Possibility of losses LO4 12-13 Price, costs, and revenue Misconceptions of Monopoly Pricing MC A Pm ATC Loss AVC V D MR=MC MR 0 Qm Quantity LO4 12-14 Economic Effects of Monopoly S=MC MC P=MC= Minimum ATC Pc D Qc (a) Purely competitive market LO5 Pm Pc b d c a MR D Qm Qc (b) Pure monopoly 12-15 Economic Effects of Monopoly • Income transfer • Cost complications • Economies of scale • Simultaneous consumption • Network effects • X-inefficiency • Rent-seeking behavior • Technological advance LO5 12-16 X-Inefficiency X Average total costs ATCx ATC1 X' ATCx' ATC2 0 LO5 Average total cost Q1 Quantity Q2 12-17 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 LO5 12-18 Global Perspective 12-19 LO3 Price Discrimination • Price discrimination • Charging different buyers different prices • Different prices are not based on cost differences • Conditions for success • Monopoly power • Market segregation • No resale LO6 12-20 Examples of Price Discrimination • • • • • • • LO6 Business travel Electric utilities Movie theaters Golf courses Railroad companies Coupons International trade 12-21 Graphical Analysis P P Economic profit Pb Economic profit MC = ATC Ps MC = ATC Ds Qb MRb (a) Small businesses LO6 Db Qs MRs (b) Students 12-22 Regulated Monopoly • Natural monopolies • Socially optimal price • Set price equal to marginal cost • Fair return price • Set price equal to average total cost LO7 12-23 Regulated Monopoly Price and costs (dollars) Monopoly price Pm Pf Fair-return price a f Pr LO7 ATC MC r MR 0 Socially optimal price Qm D b Qf Quantity Qr 12-24 Monopoly Power in the Internet Age • • • • Google dominates search Facebook dominates social media Amazon dominates as an online retailer Barriers of entry • Network effects of being large attract more users • Economies of scale 12-25