1. Pure
Monopol
y
24C H A P T E R

2. Market Structure Continuum
Pure
Competition
Pure
Monopoly
Monopolistic
Competition Oligopoly
FOUR MARKET MODELS
Pure Monopoly:
• Single Seller
• No Close Substitutes
• Price Maker
• Blocked Entry
• Nonprice Competition

3. MONOPOLY EXAMPLES
Pure Monopoly
Regulated Monopoly
Near Monopolies
Dual Objectives of the
Study
• Monopoly as a Market
Structure
• To Better Understand
Other Market

4. BARRIERS TO ENTRY
Economies of Scale
• The Natural Monopoly
Case
• Minimum Efficient Scale
Legal Barriers to Entry
• Patents
• Licenses
Ownership or Control of
Essential Resources
Pricing and Other
Strategic Barriers to Entry

5. AverageTotalCost
Quantity
$20
15
10
0 50 100 200
ATC
If ATC declines over extended
output, least-cost production is
realized only if there is one
producer - a natural monopoly.
THE NATURAL MONOPOLY CASE

6. MONOPOLY DEMAND
3 Basic Assumptions:
• Monopoly Status is
Secure
• No Governmental
Regulation
• Firm Charges the Same
Price for all Units Sold
Market Demand Curve is
the Firm’s Demand Curve

7. MONOPOLY DEMAND
1 2 3 4 5 6
P
Q
$142
132
D
As price decreases from
$142 to $132...
Loss = $30
Gain = $132
but revenue will
increase with the
additional
unit sold.

8. MONOPOLY DEMAND
1 2 3 4 5 6
P
Q
$142
132
D
As price decreases from
$142 to $132...
Loss = $30
Gain = $132
but revenue will
increase with the
additional
unit sold.
Marginal Revenue
$142 - $30 = $102
will necessarily be
less than price $132

9. MONOPOLY REVENUES & COSTS
Marginal
Revenue
0
Quantity
of
Output
Price
(Average
Revenue)
Total
Revenue
Marginal
Cost
Profit +
or
loss -
$172 $ 0 - $100
Average
Total
Cost
Total
Cost
$100
Revenue Data Cost Data
x = - =

10. 0 $172 $ 0 - $100$100
MONOPOLY REVENUES & COSTS
Marginal
Revenue
0
1
90
Quantity
of
Output
Price
(Average
Revenue)
Total
Revenue
Marginal
Cost
Profit +
or
loss -
$172
162
$ 0
162
$162
- $100
- 28
Average
Total
Cost
$190.00
Total
Cost
$100
190
] ]
Revenue Data Cost Data
x = - =
MR = $162 – 0 = $162 MC = $190 – 100 = $90
MR > MC
Loss Improvement
from -$100 to -$28
Check next unit of
output!

11. MONOPOLY REVENUES & COSTS
Marginal
Revenue
0
1
2
3
4
5
6
7
8
9
10
90
80
70
60
70
80
90
110
130
150
Quantity
of
Output
Price
(Average
Revenue)
Total
Revenue
Marginal
Cost
Profit +
or
loss -
$172
162
152
142
132
122
112
102
92
82
72
$ 0
162
304
426
528
610
672
714
736
738
720
$162
142
122
102
82
62
42
22
2
- 18
- $100
- 28
+ 34
+ 86
+ 128
+ 140
+ 122
+ 74
- 14
- 142
- 310
Average
Total
Cost
$190.00
135.00
113.33
100.00
94.00
91.67
91.43
93.73
97.78
103.00
Total
Cost
$100
190
270
340
400
470
550
640
750
880
1030
]
]
]
]
]
]
]
]
]
]
]
]
]
]
]
]
]
]
]
]
Revenue Data Cost Data

12. MONOPOLY REVENUES & COSTS
Marginal
Revenue
0
1
2
3
4
5
6
7
8
9
10
90
80
70
60
70
80
90
110
130
150
Quantity
of
Output
Price
(Average
Revenue)
Total
Revenue
Marginal
Cost
Profit +
or
loss -
$172
162
152
142
132
122
112
102
92
82
72
$ 0
162
304
426
528
610
672
714
736
738
720
$162
142
122
102
82
62
42
22
2
- 18
- $100
- 28
+ 34
+ 86
+ 128
+ 140
+ 122
+ 74
- 14
- 142
- 310
Average
Total
Cost
$190.00
135.00
113.33
100.00
94.00
91.67
91.43
93.73
97.78
103.00
Total
Cost
$100
190
270
340
400
470
550
640
750
880
1030
]
]
]
]
]
]
]
]
]
]
]
]
]
]
]
]
]
]
]
]
Revenue Data Cost Data
Can you see profit
maximization? MR > = MC

13. MONOPOLY REVENUES & COSTS
Marginal
Revenue
0
1
2
3
4
5
6
7
8
9
10
90
80
70
60
70
80
90
110
130
150
Quantity
of
Output
Price
(Average
Revenue)
Total
Revenue
Marginal
Cost
Profit +
or
loss -
$172
162
152
142
132
122
112
102
92
82
72
$ 0
162
304
426
528
610
672
714
736
738
720
$162
142
122
102
82
62
42
22
2
- 18
- $100
- 28
+ 34
+ 86
+ 128
+ 140
+ 122
+ 74
- 14
- 142
- 310
Average
Total
Cost
$190.00
135.00
113.33
100.00
94.00
91.67
91.43
93.73
97.78
103.00
Total
Cost
$100
190
270
340
400
470
550
640
750
880
1030
]
]
]
]
]
]
]
]
]
]
]
]
]
]
]
]
]
]
]
]
Revenue Data Cost Data

14. MONOPOLY REVENUES & COSTS
DollarsDollars
$200
150
200
50
$750
500
250
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q

15. MONOPOLY REVENUES & COSTS
DollarsDollars
$200
150
200
50
$750
500
250
MR
Elastic
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
D
Q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
TR
Q

16. MONOPOLY REVENUES & COSTS
Q
DollarsDollars
$200
150
200
50
$750
500
250
TR
MR D
InelasticElastic
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

17. OUTPUT AND PRICE DETERMINATION
Cost Data
MR = MC Rule
No Monopoly Supply Curve
Monopoly Pricing
Misconceptions
• Not Highest Price
• Total, Not Unit, Profit
• Possibility of Losses
Graphically…

18. Profit Maximization Under Monopoly
D
MC
ATC
MR
$94
$122
Profit
MR = MC
Profit
Per Unit
OUTPUT AND PRICE DETERMINATION
Q
200
175
150
125
100
75
50
25
0 1 2 3 4 5 6 7 8 9 10
Price,costs,andrevenueRemember the MR=MC Rule?

19. Profit Maximization Under Monopoly
D
MC
ATC
MR
$94
$122
Profit
MR = MC
Profit
Per Unit
OUTPUT AND PRICE DETERMINATION
Q
200
175
150
125
100
75
50
25
0 1 2 3 4 5 6 7 8 9 10
Price,costs,andrevenue

20. Loss Minimization Under Monopoly
D
MC
ATC
MR
A
Pm
Loss
MR = MC
Loss
Per Unit
OUTPUT AND PRICE DETERMINATION
Q
200
175
150
125
100
75
50
25
0 1 2 3 4 5 6 7 8 9 10
Price,costs,andrevenue
AVC
Qm
V
Since Pm exceeds AVC,
the firm will produce

21. Loss Minimization Under Monopoly
D
MC
ATC
MR
A
Pm
Loss
MR = MC
Loss
Per Unit
OUTPUT AND PRICE DETERMINATION
Q
200
175
150
125
100
75
50
25
0 1 2 3 4 5 6 7 8 9 10
Price,costs,andrevenue
AVC
Qm
V
What are the
Economic Effects
of Monopoly?

22. Q
INEFFICIENCY OF PURE MONOPOLY
P
D
MR
S = MC
Pc
Pm
QcQm
At MR=MC
A monopolist
will sell less
units at a
higher price
than in
competition
An industry in pure competition
sells where supply and
demand are equal

23. Q
INEFFICIENCY OF PURE MONOPOLY
P
D
MR
S = MC
Pc
Pm
QcQm
At MR=MC
A monopolist
will sell less
units at a
higher price
than in
competition
Monopoly pricing effectively
creates an income transfer from
buyers to the seller!

24. COST COMPLICATIONS
Averagetotalcosts
Quantity
Average
Total Costs
X
X’
Q1 Q2
ATCx
ATC1
ATC2
ATCx’
Economies of Scale
Simultaneous Consumption
Network Effects
X-Inefficiency Inefficient internal
operation leads to
higher-than-
necessary costs

25. COST COMPLICATIONS
Economies of Scale
Simultaneous Consumption
Network Effects
X-Inefficiency
Rent-Seeking Expenditures
Rent-Seeking Behavior
Technological Advance
Assessment and Policy Option
Antitrust Action
Regulate Natural Monopoly
Ignore it, if it is Short-Lived

26. Conditions
Monopoly Power
Market Segregation
No Resale
Consequences
More Profit
More Production
PRICE DISCRIMINATION
Graphically…

27. Q
D
MR
MC
ATC
P
Q1
PriceandCosts
Economic profits with
a single MR=MC
price
PRICE DISCRIMINATION

28. Q
D
MC
ATC
P
Q1
PriceandCosts
PRICE DISCRIMINATION
Q2
A perfectly discriminating
monopolist has MR=D,
producing more product
and more profit!
MR=D

29. Q
D
MC
ATC
P
Q1
PriceandCosts
Economic profits with
price discrimination
PRICE DISCRIMINATION
Q2
MR=D

30. Natural Monopolies
Rate Regulation
Socially Optimum Price
P = MC
Fair-Return Price
P = ATC
Dilemma of Regulation
REGULATED MONOPOLY
Graphically…

31. REGULATED MONOPOLY
Q
D
MR
MC
ATC
P
PriceandCosts
Monopoly Price
MR = MC
Qm
Pm

32. REGULATED MONOPOLY
Q
D
MR
MC
ATC
P
PriceandCosts
Fair-Return Price
Normal Profit Only
Qf
Pf

33. REGULATED MONOPOLY
Q
D
MR
MC
ATC
P
PriceandCosts
Socially-Optimum
Price
P = MC
Qr
Pr

34. REGULATED MONOPOLY
Q
D
MR
MC
ATC
PPriceandCosts
MR = MC
Fair-Return Price
Socially-Optimum
Price
Qm Qf Qr
Dilemma of Regulation
Which Price?
Pm
Pf
Pr

35. Monopolistic
Competition
& Oligopoly
Chapter 25
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