Transcript The Pure Monopoly

The Pure Monopoly
The fun and excitement of a single firm in the
industry!!!!
Characteristics of the Monopoly Market
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Single seller
No close substitutes
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“Price maker”
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With marketable substitutes the
monopoly would not retain price
control
As opposed to the PC firms price
taking
High barriers to entry
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Entry is restricted by
technology, patents, or cash
outlays
Non-price competition
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Generally none, only to influence
demand
Barriers to Entry
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Economies of Scale
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The cost of entering an industry
and size of those in the industry
dissuade others from entering
Patents and Licenses
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Legal barriers keep other firms
from entering
Ownership of Resources
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DeBeers Diamond company
markets about 70% of all
diamonds in the world
Pricing
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Lowering prices to drive out
competition
Monopoly Demand
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The key to remember
is that MR is less than
Price
Because of this the MR
curve slopes down
much faster than the
demand curve
Do we understand MR???
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If we understand MR and how it
relates to TR, we can answer the
following question:
On two graphs, one on top of the
other, please sketch a monopoly firm
and below it a total revenue graph for
the firm (no numbers required)
MR=MC
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The monopoly firm still produces at
the quantity for which MR=MC.
The Monopolist firm then goes to the
demand curve to find its price
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“up to the demand curve, make
a left”
Efficiency and the Monopoly firm
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Monopolies are NOT efficient producers
Remember allocative and productive efficiency: P=MC and
P=min ATC
In monopoly firms, because there is no threat of competition
firms need not produce at minimum ATC
Monopolies levy in effect a “private tax” on consumers which
leads to redistribution of income and a loss of consumer
surplus
This is referred to as a “deadweight loss” to society
Efficiency and the Monopoly firm
Points of Efficiency
Socially Optimal Price
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The socially optimal output
is where P=MC, this is a
simulation of a PC market
because it sets a legal price
ceiling. The monopolist
faced with a price ceiling
will choose to produce all
units for which P>MC
Fair Return Price
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This is a price at which
P=ATC. At this point a
firm will be returned
exactly what it cost to
produce, on a per-unit
basis.
Results of Inefficiency
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The result of inefficiency is the under allocation of the good or
service being provided
As we can see in the graph below, a PC market would provide
more goods, at a lower price than the monopoly market
The result is fewer satisfied customers and a loss of benefit to
society
Results of Inefficiency
Price Discrimination
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Since a monopolist is a “price maker”
they can often discriminate in their
prices, charging each customer what
they are “willing and able” to pay
This eliminates all consumer surplus
by eliminating the difference between
actual price and the price the
consumer was willing to pay
Airlines and cell phone companies are
great examples of price discriminators