Chapter 12 Pure Monopoly

Discuss the economic effects of monopoly

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Negative effects of the Monopoly on the Economy

1. Although there are legitimate concerns of the effects of monopoly power on the economy, monopoly power is not widespread. While research and technology may strengthen monopoly power, overtime it is likely to destroy monopoly position. 2. When monopoly power is resulting in an adverse effect upon the economy, the government may choose to intervene on a case-by-case basis.

What are the three forms of price discrimination.

1. Charging each customer in a single market the maximum price he or she is willing to pay. 2. Charging each customer one price for the first set of units purchased, and a lower price for subsequent units. 3. Charging one group of customers one price and another group a different price.

List and explain the barriers to entry that shield pure monopolies from competition

1. Economies of Scale 2. Legal barriers 3. Price Cutting or Advertising 4. Ownership or control of essential resources 5. pricing or other strategic barriers such as selective price-cutting and advertising.

What are some cost complications of a pure monopoly?

1. Economies of scale may result in one or two firms operating in an industry experiencing lower ATC than many competitive firms. These economies of scale may be the result of spreading large initial capital cost over a large number of units of output (natural monopoly) or, more recently, spreading product development costs over units of output, and a greater specialization of inputs. 2. X-inefficiency may occur in monopoly since there is no competitive pressure to produce at the minimum possible costs. 3. Rent-seeking behavior often occurs as monopolies seek to acquire or maintain government-granted monopoly privileges. Such rent-seeking may entail substantial costs (lobbying, legal fees, public relations advertising, etc.), which are inefficient.

What are some misconceptions in regards to Monopolies and their prices?

1. Monopolist cannot charge the highest price it can get, because it will maximize profits where total revenue minus total cost is greatest. This depends on quantity sold as well as on price and will never be the highest price possible. 2. Total, not unit, profits is the goal of the monopolist. Table 12.1 has an example of this, in which unit profits are $32 at 4 units of output compared with $28 at the profit-maximizing output of 5 units. Once again, quantity must be considered as well as unit profit. 3. Unlike the purely competitive firm, the pure monopolist can continue to receive economic profits in the long run. Although losses can occur in a pure monopoly in the short run (P>AVC), the less-than-profitable monopolist will shutdown in the long run (P>ATC). Figure 10.5 shows a short-run loss situation for a monopoly firm.

Conditions needed for successful price discrimination:

1. Monopoly power is needed with the ability to control output and price. 2. The firm must have the ability to segregate the market, to divide buyers into separate classes that have a different willingness or ability to pay for the product (usually based on differing elasticities of demand). 3. Buyers must be unable to resell the original product or service.

What assumptions are made in regards to the demand curve

1. The monopoly is secured by patents, economies of scale, or resource ownership. 2. The firm is not regulated by any unit of government. 3. The firm is a single-price monopolist; it charges the same price for all units of output.

List the characteristics of pure monopoly.

1. There is a single seller so the firm and industry are synonymous. 2. There are no close substitutes for the firm's product. 3. The firm is a "price maker," that is, the firm has considerable control over the price because it can control the quantity supplied. 4. Entry into the industry by other firms is blocked. 5. A monopolist may or may not engage in nonprice competition. Depending on the nature of its product, a monopolist may advertise to increase demand.

Explain how a pure monopoly sets its profit-maximizing output and price.

B. The MR = MC rule will tell the monopolist where to find its profit-maximizing output level. This can be seen in Table 12.1 and Figure 12.4. The same result can be found by comparing total revenue and total costs incurred at each level of production. C. 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 location of the demand curve

What are examples of Near Monopolies

Central Microprocessors (Intel), First Data Resources (Western Union), Wham-o (Frisbees), and Brannock Device Company (shoe sizing devices),

Explain the economies of scale barrier to entry of a pure monopoly

Economies of scale constitute one major barrier. This occurs where the lowest unit costs and, therefore, lowest unit prices for consumers depend on the existence of a small number of large firms or, in the case of a pure monopoly, only one firm. Because a very large firm with a large market share is most efficient, new firms cannot afford to start up in industries with economies of scale

Explain what legal barriers provide a barrier to entry

Legal barriers to entry into a monopolistic industry also exist in the form of patents and licenses. 1. Patents grant the inventor the exclusive right to produce or license a product for twenty years; this exclusive right can earn profits for future research, which results in more patents and monopoly profits. 2. Licenses are another form of entry barrier. Radio and TV stations, taxi companies are examples of government granting licenses where only one or a few firms are allowed to offer the service.

Explain how demand is seen by a pure monopoly.

Monopoly demand is the industry (market) demand and is therefore downward sloping.

When is price discrimination illegal?

Price discrimination is common and only illegal when the firm is using it to lessen or eliminate competition.

Describe why a monopolist might prefer to charge different prices in different markets

Price discrimination occurs when a given product is sold at more than one price and the price differences are not based on cost differences.

What does elasticity have to do with price setting?

Price elasticity also plays a role in monopoly price setting. The total revenue test shows that the monopolist will avoid the inelastic segment of its demand schedule. As long as demand is elastic, total revenue will rise when the monopoly lowers its price, but this will not be true when demand becomes inelastic. At this point, total revenue falls as output expands, and since total costs rise with output, profits will decline as demand becomes inelastic. Therefore, the monopolist will expand output only in the elastic portion of its demand curve.

Explain Marginal Revenue in a Pure Monopoly

Price will exceed marginal revenue because the monopolist must lower the price to sell the additional unit. The added revenue will be the price of the last unit less the sum of the price cuts which must be taken on all prior units of output The marginal-revenue curve is below the demand curve, and when it becomes negative, the total-revenue curve turns downward as total-revenue falls.

What are examples of Pure Monopolies

Public utilities—gas, electric, water, cable TV, and local telephone service companies

What is a pure Monopoly

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

Explain what a price maker is

The monopolist is a price maker. The firm controls output and price but is not free of market forces, since the combination of output and price that can be sold depends on demand

Distinguish between the monopoly price, the socially optimal price, and the fair-return price of a government-regulated monopoly.

The socially optimal price is where Price = Marginal Cost ( Most efficient but monopolist incurs losses which would require subsidies) The Fair Return Price of a government regulated monopoly is where Price = Average Cost (Minimum average total cost, Allocative efficiency doesn't occur at this price but monopoly firms don't incur a loss at this point.)