Chapter 12

Pure Monopoly

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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
LO

12-2

Examples of Monopoly
Public utility companies
Natural gas
Electric
Cable television
Near monopolies
Intel
Wham-O
Professional sports teams
LO

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
LO

12-4

Economies of Scale

$20
15
ATC

10

50

LO

100

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

LO

12-6

Monopoly Demand
Revenue and Cost Data of a Pure Monopolist
Revenue Data
(1)
Quantity
of Output

(2)
Price
(Average
Revenue)

(3)
Total
Revenue
(1) X (2)

Cost Data
(4)
Marginal
Revenue

(5)
Average
Total Cost

(6)
Total Cost
(1) X (5)

(7)
Marginal
Cost

(8)
Profit (+)
or
Loss (-)

$ 172

$0

162

162

$ 162

$ 190.00

190

$ 90

-28

152

304

142

135.00

270

80

+34

142

426

122

113.33

340

70

+86

132

528

102

100.00

400

60

+128

122

610

82

94.00

470

70

+140

112

672

62

91.67

550

80

+122

102

714

42

91.43

640

90

+74

92

736

22

93.75

750

110

-14

82

738

97.78

880

130

-142

10

72

720

-18

103.00

1030

150

-310

$ 100

$ -100

12-7

Monopoly Demand

Loss = $30

Gain = $132

LO

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

LO

12-9

Demand, Marginal Revenue, and

Total Revenue
Elastic

Inelastic

MR

Total-revenue curve

TR

LO

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
monopolists demand curve.

Step 3

Determine the pure monopolists 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 profitmaximizing price. Then multiply the difference by the profitmaximizing 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
12-11
profit-maximizing price. Then subtract total cost from total

Output and Price Determination

Price, costs, and revenue

$200
175

MC

Pm=$122

150
125
100
75

Economic
profit

ATC
D

A=$94
MR=MC

50
25
0

LO

MR
1

5 6 7
Quantity

10
12-12

Misconceptions Concerning
Monopoly Pricing
Not the highest price
Total profit
Possibility of losses

LO

12-13

Misconceptions of Monopoly
Pricing
MC
A
Pm

ATC

Loss

AVC

V
D
MR=MC
MR
0

LO

Qm
12-14

Economic Effects of Monopoly

S=MC
P=MC=
Minimum
ATC

Pc

MC
Pm
Pc

b
d
a

D
Qc
(a)
Purely competitive market

LO

Qm

MR
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
LO

12-16

X-Inefficiency

ATCx

ATC1
X'
ATCx'

Average
total cost

ATC2

Q1

LO

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
LO

12-18

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
LO

12-19

Examples of Price
Discrimination

LO

Business travel
Electric utilities
Movie theaters
Golf courses
Railroad companies
Coupons
International trade
12-20

Graphical Analysis

Economic
profit

Pb

Economic
profit

MC = ATC
Q
b

MRb

(a) Small
businesses
LO

Ps

Qs

MC =
ATC
Ds
MRs

(b) Students

12-21

Regulated Monopoly
Natural monopolies
Socially optimal price
Set price equal to marginal cost
Fair return price
Set price equal to average total
cost

LO

12-22

Regulated Monopoly

Monopoly
price
Pm

Pf

Fair-return
price
a

Pr

r
MR
Qm

LO

Socially
optimal
price ATC

b
Qf

MC
D

Qr
12-23

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
12-24