Transcript Pure Monopoly
10
McGraw-Hill/Irwin
Pure Monopoly
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
LO1 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 entry block potential competition Non-price competition – mostly PR or advertising the product 10-2
LO1 Examples of Monopoly
• Public utility companies • • • Natural Gas Electric Water • Near monopolies • • Intel Wham-O • Professional Sports Teams 10-3
LO1 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 10-4
LO1 Economies of Scale
$20 15 10
0
50 100
Quantity
200 ATC
10-5
LO1 Monopoly Demand
• • The pure monopolist is the industry Demand curve is the market demand curve • Downsloping demand curve • Marginal revenue is less than price 10-6
Monopoly Demand Table 10.1 Revenue and Cost Data of a Pure Monopolist Revenue Data Cost Data
(1) Quantity of Output 0 1 2 3 4
5
6 7 8 9 10 (2) Price (Average Revenue) $ 172 162 152 142 132
122
112 102 92 82 72 (3) Total Revenue (1) X (2) $0 162 304 426 528
610
672 714 736 738 720 ( 4) Marginal Revenue $ 162 142 122 102
82
62 42 22 2 -18 (5) Average Total Cost $ 190.00
135.00
113.33
100.00
94.00
91.67
91.43
93.75
97.78
103.00
(6) Total Cost (1) X (5) $ 100 190 270 340 400
470
550 640 750 880 1030 (7) Marginal Cost $ 90 80 70 60
70
80 90 110 130 150
LO1
(8) Profit (+) or Loss (-) $ -100 -28 +34 +86 +128
+140
+122 +74 -14 -142 -310 10-7
LO1 Monopoly Demand
• All customers must pay the same price
$142 132 122 112 102 92 82 Loss = $30
D
Gain = $132 0 1 2 3 4 5 6
10-8
LO1 Monopoly Demand
• All customers must pay the same price
$142 132 122 112 102 92 82 Loss = $30 0 1 2 3 4 5 6
MR D
Gain = $132
10-9
LO2 Monopoly Demand
• • • Marginal Revenue < Price Monopolist is a price maker Monopolist sets prices in elastic region of demand curve 10-10
LO2 Output and Price Determination
Demand and Marginal-Revenue Curves
Elastic Inelastic $200 150 100 50 0 $750 2 4 MR 6 8 10 12
Total-Revenue Curve
14 16 D 18 500 250 0 TR 2 4 6 8 10 12 14 16 18
10-11
Output and Price Determination Steps for Graphically Determining the Profit-Maximizing Output, Profit Maximizing Price, and Economic Profits (if Any) in Pure Monopoly
Step 1 Step 2 Step 3 Determine the profit-maximizing output by finding where MR=MC.
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.
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).
LO2
Method 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).
10-12
LO2 Output and Price Determination $200 175 P
m
=$122 150 125 100 Economic Profit 75 A=$94 50 25
MR=MC
0
MC ATC
1 2 3 4 5 6
Quantity
7 8
MR
9 10
D
10-13
LO2 Misconceptions of Monopoly Pricing
• • • Not highest price Total profit Possibility of losses 10-14
LO2 Misconceptions of Monopoly Pricing
A P m
Loss
V
0
MR=MC Q m Quantity MR MC ATC AVC D
10-15
LO3 Economic Effects of Monopoly Pure competition is efficient Monopoly is inefficient S=MC
P c
P=MC= Minimum ATC
D Q c
(a) Purely Competitive Market
P m P c
MC
d b c a Q m Q c
MR (b) Pure Monopoly
D
10-16
LO3 Economic Effects of Monopoly
• • Income transfer Cost complications • • • • Economies of scale X-Inefficiency Rent seeking expenditures Technological advance 10-17
X-Inefficiency LO3 ATC x ATC 1 ATC x' ATC 2 0
Q 1
X Quantity
Q 2
X' Average total cost
10-18
LO3 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 10-19
LO3 Global Perspective Competition from Foreign Multinational Corporations
10-20
Price Discrimination LO4
• Price discrimination • Charging different buyers different prices • Price differences are not based on cost differences • Conditions for success: • • • Monopoly power Market segregation No resale 10-21
LO4 Examples of Price Discrimination
• • • • • • • Business travel Electric utilities Movie theaters Golf courses Railroad companies Coupons International trade 10-22
LO4 Graphical Analysis P P b P Economic profit Economic profit MC = ATC P s Q b MR b (a) Small businesses D b Q s (b) Students MC = ATC D s MR s
10-23
LO5 Regulated Monopoly
• • • Natural monopolies Socially optimal price • Set price = marginal cost Fair return price • Set price = ATC 10-24
LO5 Regulated Monopoly
P m P f a P r
0
Q m
Monopoly Price Fair-Return Price
f MR Q f
Quantity
b
Socially Optimal Price
ATC r D MC Q r
10-25
De Beers’s Diamonds
• • • De Beers once controlled about 80% of the world’s diamond market Monopoly position eroded over time • • • New diamond discoveries Nearly perfect artificial diamonds Unfavorable media attention Now focus on increasing demand for diamonds rather than controlling supply 10-26