CH 12 PURE MONOPOLY

Monopoly Demand

- The pure monopolist is the industry - Monopolist demand curve is the market demand curve - Demand curve is down sloping - Marginal revenue is less than price because a Firm has to lower price for all other units not just the last one. (mr is the change in tr)

Economies of Scale in a pure monopoly

1. declining average total cost with added firm size; a firm's long-run average-cost schedule will decline over a wide range of output. 2. only a few large firms or, in the extreme, only a single large firm can achieve low average total costs. 3.

Four reasons costs differ from a monopoly vs a purely competitive

1. economies of scale simultaneous consumption The same-time derivation of utility from some product by a large number of consumers. Network effects Increases in the value of a product to each user, including existing users, as the total number of users rises. 2. X-inefficiency managers may have goals, such as expanding power, an easier work life, avoiding business risk, or giving jobs to incompetent relatives, that conflict with cost minimization. Or X-inefficiency may arise because a firm's workers are poorly motivated or ineffectively supervised. Or a firm may simply become lethargic and inert, relying on rules of thumb in decision making as opposed to careful calculations of costs and revenues. 3. need for monopoly preserving expenditures 4. the very long run perspective

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; creative destruction

Economic Effects of Monopoly

Income transfer - a monopoly transfers income from consumers to the owners of the monopoly. The income is received by the owners as revenue. Because a monopoly has market power, it can charge a higher price than would a purely competitive firm with the same costs. So the monopoly in effect levies a "private tax" on consumers. This private tax can often generate substantial economic profits that can persist because entry to the industry is blocked.

Misconceptions Concerning Monopoly Pricing

Not highest price - but the monopolist shuns them because they yield a smaller-than-maximum total profit. The monopolist seeks maximum total profit, not maximum price. Some high prices that could be charged would reduce sales and total revenue too severely to offset any decrease in total cost. Total profit - The monopolist seeks maximum total profit, not maximum unit profit. monopolist accepts a lower-than-maximum per-unit profit because additional sales more than compensate for the lower unit profit. Possibility of losses - The monopolist is not immune from changes in tastes that reduce the demand for its product. Nor is it immune from upward-shifting cost curves caused by escalating resource prices.

Legal Barriers to Entry: Patents and Licenses

Patents - exclusive right of an inventor to use, or to allow another to use, her or his invention. Patents and patent laws aim to protect the inventor from rivals who would use the invention without having shared in the effort and expense of developing it ; agreed on a uniform patent length of 20 years from the time of application. Licenses - Government may also limit entry into an industry or occupation through licensing. At the national level, the Federal Communications Commission licenses only so many radio and television stations in each geographic area.

inefficiency of Pure Monopoly

Productive efficiency is achieved because free entry and exit force firms to operate where average total cost is at a minimum. (P = min. ATC) Allocative efficiency; price = marginal cost Monopoly yields neither productive nor allocative efficiency. Monopoly price is more than min atc and is more than marginal cost, and there output is lower too (underproduction = allocative inefficiency) deadweight loss is between the output where MR=MC and the output where MB=MC (D=MC)

Examples of Monopoly

Public utility companies (natural gas, electric, cable television) near monopolies = Intel (80%) and wham-o (90%)

Output and price determination

Step 1: find where MR = MC Step 2: extend that point of mr=mc to the demand line (vertically) Step 3: the point of the demand line extends horizontally to show price Step 4: find the point where mr = mc leads to the atc line subract the atc price from the market price

Demand, marginal revenue, and total revenue for a pure monopolist.

TR increase Price decrease = elastic TR decrease Price decrease = inelastic Because marginal revenue is the change in total revenue, marginal revenue is positive while total revenue is increasing. When total revenue reaches its maximum, marginal revenue is zero. When total revenue is diminishing, marginal revenue is negative.

The Monopolist Sets Prices in the Elastic Region of Demand

The implication is that a monopolist will never choose a price-quantity combination where price reductions cause total revenue to decrease (marginal revenue to be negative). The profit-maximizing monopolist will always want to avoid the inelastic segment of its demand curve in favor of some price-quantity combination in the elastic region.

Price discrimination pure monopoly

The price-discriminating monopolist charges a high price (here Pb) to small-business customers because they have a relatively inelastic demand curve for the product. (b) The firm charges a low price (here Ps) to students because their demand curve is relatively elastic. The firm's total profit from using price discrimination (here, the sum of the two green rectangles) exceeds the profit (not shown) that would have occurred if the monopolist had charged the same price to all customers.

Monopolist's Supply Curve

The pure monopolist has no supply curve.•Because there is no unique relationship between price and quantity supplied. The price and quantity supplied will always depend on the location of the demand curve.

barriers to entry in a pure monopoly

are factors that prevent firms from entering the industry 1. economies of scale 2. legal barriers to entry like patents and licenses 3. ownership or control of essential resources 4. Pricing and other strategic barriers

Regulated Monopoly

fair return price and socially optimal price

natural monopoly

if the market demand curve intersects the long-run ATC curve at any point where average total costs are declining.

The Monopolist Is a Price Maker

in deciding on the quantity of output to produce, the monopolist is also determining the price it will charge.

Monopoly demand schedule

produce where MR=MC

Pure Monopoly Characteristics

single seller - sole producer no close substitutes - unique product price maker - control overprice blocked entry - strong barriers to entry nonprice competition