This document provides an overview of pure monopoly, including its key characteristics, profit maximization approach, economic effects, and comparisons to perfect competition. A pure monopoly is dominated by a single seller with significant barriers to entry. It faces a downward-sloping demand curve and sets price above marginal cost to maximize total profits. This results in a deadweight loss to society in the form of unused productive capacity. The document also discusses price discrimination, regulated monopolies, and examples like De Beers diamonds.
2. Chapter Objectives
• Characteristics of pure monopoly
• Profit-maximizing output and price
• Economic effects of monopoly
• Charging different prices in
different markets
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17. Examples of Monopoly
• Geographic monopolies
–Professional sport teams
• Dual objectives of study
For understanding two other market models
Oligopoly and Monopolistic Competition. Because
these two markets combine in different degrees
and characteristics of pure competition and pure
Monopoly.
18. 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
20. “ After discussing the sources, in
order to understand fully pure
Monopoly we have to analyze the
Price and output decision of Pure
Monopoly”
21. Monopoly Demand
• Assumptions:
1. Monopoly status is secure
2. No government regulation
3. Single-price monopolist
• Face down-sloping demand
–Entire market demand
26. Price and Marginal Revenue
1. Marginal revenue is less than price
• A monopolist is
selling 3 units at $142
$142 132
• To sell 4, price must 122
Loss = $30
be lowered to $132 112 D
• All customers 102
Gain = $132
must pay the same 92
price 82
• TR increases $132
minus $30 (3x$10)
0 1 2 3 4 5 6
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27. Price and Marginal Revenue
Marginal revenue is less than price
• A monopolist is
selling 3 units at
$142
• To sell 4, price must $142
be lowered to $132 132
• All customers 122
must pay the same 112 Loss = $30 D
price
102
• TR increases $132 Gain = $132
minus $30 (3x$10) 92
• $102 becomes a 82
point on the MR
curve MR
• Try other prices to
determine other
0 1 2 3 4 5 6
MR points
The Constructed Marginal Revenue Curve
Must Always Be Less Than the Price
28. Down-Sloping Demand
• Marginal revenue < price
–To increase sales, must lower price
• Firm is a price maker
–Choose P,Q combination
• Operate in the elastic region
–Marginal revenue > 0
–Total-revenue test (recall)
29. Difference between pure
competition and monopoly
• For a competitive firm: P = MR = MC.
• For a monopoly firm: P > MR = MC
39. Economic Effects
Purely Pure
Competitive Monopoly
Market
S=MC MC
Pm b
P=MC=
Pc Minimum Pc c
ATC
a
D D
MR
Qc Qm Qc
Pure competition is efficient
Monopoly is inefficient
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40. Economic Effects
• Pure competition is efficient
–Productive efficiency
–Allocative efficiency
–CS+PS maximized
• Monopoly is inefficient
–Charge P>MC
–Deadweight loss
• Income transfer
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41. Cost Complications
• Economies of scale
–Simultaneous consumption
–Network effects
• X-inefficiency
–Lowest ATC not achieved
• Rent seeking behavior
• Technological advance
–More likely with monopoly?
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42. Price Discrimination
• Three forms
– Charge each customer max
willingness to pay
– Charge one price for first unit and a
lower price for subsequent units
– Charge different customers
different prices
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43. Price Discrimination
• Conditions
– Monopoly power
– Market segregation
– No resale
• Examples
– Airfares
– Electric utilities
– Theaters & golf courses
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44. Regulated Monopoly
• Natural monopolies
• Rate regulation
• Socially optimum price
P = MC
• Fair return price
P = ATC
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45. Regulated Monopoly
Dilemma of Regulation
Monopoly
Price
Price and Costs (Dollars)
Pm
Fair-Return
Price
Socially
f Optimal
Pf a Price
ATC
Pr
r MC
MR D
b
0 Qm Qf Qr
Quantity
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46. De Beers Diamonds
• 66 years of monopoly pricing
–Independent producers went along
• Mid-2000 abandoned monopoly
–New discoveries
–Independent producers withdrew
–Political considerations
• New strategy
–“The diamond supplier of choice”
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