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

LO1 12-2
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Examples of Monopoly
• Public utility companies
• Natural gas
• Electric
• Cable television
• Near monopolies
• Intel
• Wham-O
• Professional sports teams
LO1 12-3
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 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
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Economies of Scale

$20
Average total cost

15

ATC
10

0 50 100 200
Quantity

LO2 12-5
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 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
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 Monopoly Demand Schedule
Revenue and Cost Data of a Pure Monopolist
Revenue Data Cost Data
(1) Quantity (2) (3) (4) Marginal (5) (6) (7) (8)
of Output Price Total Revenue Average Total Cost Marginal Profit (+) or
(Average Revenue Total Cost (1) × (5) Cost Loss (-)
Revenue) (1) × (2)

0 $ 172 $0 $ 100 $ -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
LO3 12-7
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Monopoly Demand Curve

$142
132
122
112 Loss = $30 D
102
Gain = $132
92
82

0 1 2 3 4 5 6

LO3 12-8
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 Monopoly Demand Continued
• 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
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Demand, Marginal Revenue,
and Total Revenue
$200 Elastic Inelastic

150
Price

100

50
D
MR
0 2 4 6 8 10 12 14 16 18
Total-revenue curve
$750
Total revenue

500

250
TR

0 2 4 6 8 10 12 14 16 18
LO3 12-10
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Output and Price Determination
$200

175
Pm=$122 MC
150
Price, costs, and revenue

125
Economic
profit ATC
100

75 D
A=$94
MR=MC
50

25
MR
0
1 2 3 4 5 6 7 8 9 10
Quantity
LO4 12-11
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Output and Price Determination
Steps
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.
Determine the profit-maximizing price by extending a vertical line upward
Step 2 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

Step 3 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 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).
LO4 12-12
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 Misconceptions Concerning
Monopoly Pricing
• Not the highest price
• Total profit
• Possibility of losses

LO4 12-13
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 Misconceptions of Monopoly
Pricing
MC
Price, costs, and revenue

ATC
A Loss
Pm
AVC

V
D
MR=MC

MR
0 Qm
Quantity
LO4 12-14
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Inefficiency of Pure Monopoly

S = MC MC
Pm b
P = MC = d
Pc Pc c
Minimum
ATC a

D D
MR
Qc Qm Qc

(a) (b)
Purely competitive market Pure monopoly

LO5 12-15
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 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
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 X-Inefficiency

X
ATCx
Average total costs

ATC1

X'
ATCx' Average
ATC2 total cost

0 Q1 Q2
Quantity

LO5 12-17
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 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
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Global Perspective

LO5 12-19
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 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
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 Examples of Price
Discrimination
• Business travel
• Electric utilities
• Movie theaters
• Golf courses
• Railroad companies
• Coupons
• International trade

LO6 12-21
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 Graphical Analysis

P P
Economic
profit Economic
Pb
profit

Ps
MC = ATC MC = ATC
Qs Ds
Qb
MRb Db MRs

(a) Small businesses (b) Students

LO6 12-22
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 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
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 Regulated Monopoly
Continued
Monopoly
price

Pm
Price and costs (dollars)

Fair-return
price
Socially
a f optimal
Pf price
ATC

Pr r MC
MR D
b
0
Qm Qf Qr
Quantity
LO7 12-24
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Personalized Pricing on the
Internet
• “Big Data” available to Internet retailers
• Ability to set a price according to
consumer’s perceived ability to pay
• Based on your online buying habits,
backgrounds, and preferences
• Low price for those with elastic demand
• Higher price for those with inelastic demand
• Personalized pricing strategy can fail when
consumers comparison shop
12-25
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.