Chapter 12 Pure Monopoly

price discrimination

-charging each customer in a single market the maximum price she or he is willing to pay -charging each customer one price for the first set of unit purchased and a lower price for subsequent unit purchased -charging some customers one price and other customers another

Conditions for price discrimination

1. Monopoly power- the seller must be an monopolist or at least must posses some degree of monopoly power, that is, some ability to control output and price 2. Market segregation- the seller must be able to segregate buyers into distinct classes, each or which has a different willingness or ability to pay for the product- usually based on price elasticities of demand 3. No resale- the original purchaser cannot cannot resell a product or service

Characteristics of a Pure Monopoly

1. Single seller- single firm is the sole producer 2. No close substitutes- product is unique 3. Price maker- controls the total quantity supplied and thus has considerable control over price- it can change it product price by changing the quantity of the product it produces 4. Blocked entry- no immediate competitors 5. Nonprice competition- may be standardized or differentiated monopolists that have standardized products engage mainly in public relations advertising

Costs may not be the same for purely competitive and monopolistic producers. Four reasons they may differ:

1. economies of scale- 2. X-inefficiency 3. the need for monopoly preserving expenditures 4. the "very long run" perspective- allows for technological advance

Marginal revenue is less than price

A pure monopoly can increase sales by charging a lower price , thus marginal revenue is less than price (average revenue) The lower price of the extra unit of output also applies to all prior units of output. The monopolist could have sold these prior unit at a higher price if it had not produced and sold the extra output. Each additional unit of output sold increase total revenue by an amount equal to its own price less the sum of the price cuts that apply to all prior units of output.

Economic Effects of Monopoly

Monopoly yields neither productive nor allocative efficiency. Doesn't have productive efficiency because the monopolists output Qm is less than Qc, the output at which average total cost is lowest. In addition the monopoly price Pm is higher than the competitive price Pc that we know in long-run equilibrium in pure competition equals minimum average total cost. Thus monopoly price exceeds minimum average total cost, thereby demonstrating in another way that the monopoly will not be productively efficient. Allocative inefficiency- monopolist's underproduction. monopoly output level Qm, the monopoly price Pm that consumers are willing to pay exceeds the marginal cost of production. This means that consumers values additional units of they product more highly than they do the alternative products that could be produced form the resources that would be necessary to make more units of the monopolist's product.

Monopoly pricing

Not highest price- the monopolist shields charging the highest possible price because they yield a smaller-than-maximum total profit. monopolist seeks maximum profit not maximum price Total, Not Unit, Profit The monopolist seeks maximum total profit not maximum unit profit.

Fair-return price

P= ATC for natural monopolies subject to rate (price) regulation, the price that would allow the regulated monopoly to earn a normal profit; a price equal to the average cost

Socially Optimal Price

P= MC the price of a product that results in the most efficient allocation of an economy's resources and that is equal to the marginal cost of the product

Income transfer

a monopoly transfers income from consumers to owners of a monopoly -income is received as revenue -levies a "private tax" on consumers- can often generate substantial economic profits that can persist because entry to the industry is blocked -

dilemma of regulation

comparing results of the socially optimal price (P=MC) and the fair-return price (P=ATC) suggests a policy problem when its price is set to achieve the most efficient allocation of resources, the regulated monopoly is likely to suffer losses- survival of the firm depends on permanent public subsidies on the other hand, a fair price return (P=ATC) allows the monopolist to cover costs, it only partially resolves the under allocation of resources that the unregulated monopoly price would foster

licensing

how the government may limit entry into an industry Ex: municipal license are needed to drive a taxi cab (new cabs can not enter the industry)

natural monopoly

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

network effects

increase in the value of a product to each user, including existing users as the total number of users rises

control of resources

monopoly can use private property- firm that owns or controls a resource essential to the production process can prohibit the entry of individual firms

Price maker

that total output in an industry is exactly equal to whatever the single monopoly chooses to produce- by controlling the output it can "make the price"

rent-seeking behavior

the actions by persons, firms, or unions to gain special benefits from government at the taxpayers' or someone else's expense

patent

the exclusive right of an inventor to use, or to allow another to use, her or his invention research and development leads to most patentable inventions and products

barriers to entry

the factors that prohibit firms from entering an industry 1. economies of scale 2. patenets and licenses 3. control of resources 4. pricing- slashing prices

Possibility of Losses by Monopolist

the likelihood of economic profit is greater for a pure monopoly is greater than a pure competitor monopoly is not immune from changes in tastes that reduce demand for its product and upward-shifting cost curves caused by escalating resource prices A monopoly will not persist in operating at a loss- move their resources to alternative industries that offer better profit opportunites

X-ineffiecieny

the production of output, whatever its level, at a higher average (and total) cost than is necessary for producing that level of output

simultaneous consumption

the same-time derivation of utility from some product by a large number of consumers

near-monopolies

when a single firm has the bulk of sales in a specific market Ex: professional sports teams, Google

Pure monopoly

when a single firm is the sole producer of a single product for which there are no close substitutes