Lecture Economics (18th edition): Chapter 10 - McConnell, Brue, Flynn''s

Chapter 10 - Pure monopoly. In this chapter, students will be able to understand: List the characteristics of pure monopoly, explain how a pure monopoly sets its profit-maximizing output and price, discuss the economic effects of monopoly, describe why a monopolist might prefer to charge different prices in different markets, distinguish between the monopoly price, the socially optimal price, and the fair-return price of a government-regulated monopoly.

Pure Monopoly

Chapter 10

• Economic effects of monopoly

• Charging different prices in

different markets

–Professional sport teams

• Dual objectives of study

Monopoly Demand

• Assumptions:

–Monopoly status is secure

–No government regulation

–Single-price monopolist

• Face down-sloping demand

–Entire market demand

0 1 2 3 4 5 6

$142 132 122 112 102 92 82

Price and Marginal Revenue

Marginal revenue is less than price

0 1 2 3 4 5 6

$142 132 122 112 102 92 82

The Constructed Marginal Revenue Curve Must Always Be Less Than the Price

MR

Price and Marginal Revenue

Marginal revenue is less than price

Down-Sloping Demand

• Marginal revenue < price

–To increase sales, must lower price

• Firm is a price maker

Monopoly Revenue and Costs

(1)

Quantity

Of Output

(2) Price (Average Revenue)

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

(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

$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

$100 190 270 340 400 470 550 640 750 880 1030

$90 80 70 60 70 80 90 110 130 150

$-100 -28 +34 +86 +128 +140 +122 +74 -14 -142 -310

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Can you See Profit Maximization?

$200 150 100 50

TR

Pm=$122

A=$94

Economic Profit

• Not the highest price

• Total, not unit, profit

• Possibility of losses

A

Economic Effects

Purely Competitive Market

Pure Monopoly

P=MC=

Minimum ATC

c

• Pure competition is efficient

–Lowest ATC not achieved

• Rent seeking behavior

• Technological advance

–More likely with monopoly?

Policy Options

• Use antitrust laws

–Divide the firm

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

Fair-Return Price

Socially Optimal Price

P r

D

r f

Regulated Monopoly

De Beers Diamonds

• 66 years of monopoly pricing

–Independent producers went along

• Mid-2000 abandoned monopoly

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Monopolistic

Competition

and Oligopoly