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Pure Monopoly

22. Pure Monopoly. Chapter Objectives. Characteristics of Pure Monopoly How Pure Monopoly Sets Profit Maximizing Output and Price The Economic Effects of Monopoly Why A Monopolist May Wish to Charge Different Prices in Different Markets. O 22.1. Characteristics. Single Seller

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Pure Monopoly

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  1. 22 Pure Monopoly

  2. Chapter Objectives • Characteristics of Pure Monopoly • How Pure Monopoly Sets Profit Maximizing Output and Price • The Economic Effects of Monopoly • Why A Monopolist May Wish to Charge Different Prices in Different Markets

  3. O 22.1 Characteristics • Single Seller • No Close Substitutes • “Price Maker” • Blocked Entry • Nonprice Competition • Examples • Regulated Monopolies • Near-Monopolies • Western Union-Frisbee-De Beers • Dual Objectives of Study

  4. O 22.2 Barriers to Entry • Economies of Scale • Legal Barriers to Entry • Patents • Licenses • Ownership or Control of Essential Resources • Pricing and Other Strategic Barriers to Entry

  5. Monopoly Demand • Monopoly Status is Secure • No Governmental Regulation • Firm is a Single-Price Monopolist (No Price Discrimination)

  6. $142 132 122 112 102 92 82 1 2 3 4 5 6 0 Price and Marginal Revenue Marginal Revenue is Less Than Price • A Monopolist is • Selling 3 Units at • $142 • To Sell More (4), • Price Must Be • Lowered to $132 • All Customers • Must Pay the Same • Price • TR Increases $132 • Minus $30 (3x$10) Loss = $30 D Gain = $132

  7. $142 132 122 112 102 92 82 1 2 3 4 5 6 0 Price and Marginal Revenue Marginal Revenue is Less Than Price • A Monopolist is • Selling 3 Units at • $142 • To Sell More (4), • Price Must Be • Lowered to $132 • All Customers • Must Pay the Same • Price • TR Increases $132 • Minus $30 (3x$10) • $102 Becomes a • Point on the MR • Curve • Try Other Prices to • Determine Other • MR Points Loss = $30 D Gain = $132 MR The Constructed Marginal Revenue Curve Must Always Be Less Than the Price

  8. ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Monopoly Revenue and Costs Revenue and Cost Data of a Pure Monopolist Cost Data Revenue Data (2) Price (Average Revenue) (3) Total Revenue (1) X (2) (1) Quantity Of Output (4) Marginal Revenue (5) Average Total Cost (6) Total Cost (1) X (5) (7) Marginal Cost (8) Profit (+) or Loss (-) 0 1 2 3 4 5 6 7 8 9 10 $172 162 152 142 132 122 112 102 92 82 72 $0 162 304 426 528 610 672 714 736 738 720 $100 190 270 340 400 470 550 640 750 880 1030 $-100 -28 +34 +86 +128 +140 +122 +74 -14 -142 -310 $90 80 70 60 70 80 90 110 130 150 $162 142 122 102 82 62 42 22 2 -18 $190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.75 97.78 103.00 Can you See Profit Maximization?

  9. $200 150 Price 100 50 0 2 2 4 4 6 6 8 8 10 10 12 12 14 14 16 16 18 18 $750 500 Total Revenue 250 0 Monopoly Revenue and Costs Demand, Marginal Revenue, and Total Revenue for a Pure Monopolist Demand and Marginal Revenue Curves Elastic Inelastic D MR Total-Revenue Curve TR

  10. W 22.1 G 22.1 Monopoly Revenue and Costs • Monopolist is a Price Maker • Sets Price in the Elastic Region • Output and Price Determination • Cost Data • MR = MC Rule • No Supply Curve

  11. $200 175 150 125 Price, Costs, and Revenue 100 75 50 25 1 2 3 4 5 6 7 8 9 10 Quantity Profit Maximization By A Pure Monopolist MC Pm=$122 Economic Profit ATC D A=$94 MR=MC MR 0

  12. Misconceptions Concerning Monopoly Pricing • Not the Highest Price • Total, Not Unit, Profit • Possibility of Losses

  13. Price, Costs, and Revenue Quantity Loss Minimization By A Pure Monopolist MC ATC A Loss Pm AVC V D MR=MC MR 0 Qm

  14. Economic Effects of Monopoly Price, Output, and Efficiency Pure Monopoly Purely Competitive Market S=MC MC b Pm P=MC= Minimum ATC c Pc Pc a D D MR Qc Qm Qc Pure Competition is Efficient Monopoly Price is Greater Than MC And Is Therefore Inefficient

  15. Economic Effects of Monopoly Price, Output, and Efficiency • Income Transfer • Cost Complications • Economies of Scale • Simultaneous Consumption • Network Effects

  16. O 22.3 X ATCX Average Total Cost Average Total Costs ATC1 X’ ATCX’ ATC2 Q1 Q2 Quantity Economic Effects of Monopoly • X-Inefficiency • Rent-Seeking Expenditures • Rent-Seeking Behavior • Technological Advance • Assessment and Policy Options

  17. GLOBAL PERSPECTIVE Economic Effects of Monopoly Representative Highly Competitive Foreign Multinational Corporations Main Products Company (Country) Chemicals Gasoline Tires Computers Food Products Wireless Phones Gasoline Electronics Electronics Automobiles Food Products Bayer (Germany) BP Amoco (United Kingdom Michelin (France) NEC (Japan) Nestlé (Switzerland) Nokia (Finland) Royal Dutch/Shell (Netherlands) Royal Philips (Netherlands) Sony (Japan) Toyota (Japan) Unilever (Netherlands) Source: Fortune.com

  18. O 22.4 Price Discrimination • Three Forms • Charging Each Customer the Maximum They Are Willing to Pay • Charging Each Customer One Price For The First Set of Units Purchased and a Lower Price for Subsequent Units • Charging Some Customers One Price and a Different Price for Other Customers

  19. W 22.1 Price Discrimination • Conditions • Monopoly Power • Market Segregation • No Resale • Examples of Price Discrimination • Airfares • Electric Utilities • Theaters & Golf Courses

  20. Regulated Monopoly • Natural Monopolies • Rate Regulation • Socially Optimum Price P = MC • Fair Return Price P = ATC

  21. Price and Costs (Dollars) 0 Quantity Regulated Monopoly Dilemma of Regulation Monopoly Price Pm Fair-Return Price Socially Optimal Price f Pf a ATC Pr r MC D MR b Qm Qf Qr

  22. De Beers Diamonds Last Word Are Monopolies Forever? • 66 Year Policy of Monopolizing the Diamond Trade • Mid-2000 Abandoned Monopoly Efforts • Decline in Number of Select Dealers and Cutters • Classic Monopoly Behavior • Pricing • Single-Channel Marketing

  23. De Beers Diamonds Last Word Are Monopolies Forever? • End of an Era • New Diamond Discoveries-Angola, Canada • Australian Producer Withdrew • Bad Press and Public Perception Over Civil Strife Financing Role • Becoming Cartel of Specialized High-End Diamonds • Monopoly Didn’t Last Forever!

  24. pure monopoly barriers to entry simultaneous consumption network effects X-inefficiency rent-seeking behavior price discrimination socially optimal price fair-return price Key Terms

  25. Next Chapter Preview… Monopolistic Competition and Oligopoly Chapter 23!

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