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1-1 Pure Monopoly Chapter 8 McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

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Page 1: 1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

1-1

Pure Monopoly

Chapter 8

McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Page 2: 1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

An Introduction to Pure Monopoly

• Single seller—a sole producer

• No close substitutes—unique product

• Price maker—control over price

• Blocked entry—strong barriers to entry block potential competition

• Nonprice competition—mostly PR or advertising the product

8-2

Page 3: 1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Examples of Monopoly

• Public utility companies• Natural gas• Electric• Water

• Near monopolies• Intel• Wham-O

• Professional sports teams

8-3

Page 4: 1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Barriers to Entry

• Barrier to entry: a factor that keeps firms from entering an industry

• Economies of scale

• Legal barriers: patents and licenses

• Ownership of essential resources

• Pricing

LO1 8-4

Page 5: 1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Monopoly Demand

• The pure monopolist is the industry

• The demand curve is the market demand curve

• Downsloping demand curve

• Marginal revenue is less than price

LO1 8-5

Page 6: 1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Revenue and Cost Data of a Pure Monopolist

Revenue Data Cost Data(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 (+)

orLoss (-)

0 $ 172 $0 $ 100 $ -100

1 162 162 $ 162 $ 190.00 190 $ 90 -28

2 152 304 142 135.00 270 80 +34

3 142 426 122 113.33 340 70 +86

4 132 528 102 100.00 400 60 +128

5 122 610 82 94.00 470 70 +140

6 112 672 62 91.67 550 80 +122

7 102 714 42 91.43 640 90 +74

8 92 736 22 93.75 750 110 -14

9 82 738 2 97.78 880 130 -142

10 72 720 -18 103.00 1030 150 -310

Monopoly Demand

LO2 8-6

Page 7: 1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Monopoly Demand

LO2

D

Gain = $132

Loss = $30

• All customers must pay the same price

8-7

Page 8: 1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Output and Price Determination

LO2

2 4 6 8 10 12 14 16 18

$200

150

100

50

0

Quantity

Pri

ce

D

MR

8-8

Page 9: 1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Monopoly Demand

• Marginal revenue < Price

• Monopolist is a price maker

• Monopolist sets prices in elastic region of demand curve

8-9

Page 10: 1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

$200

175

150

125

25

100

75

50Pri

ce,

Co

sts,

an

d R

even

ue

1 2 3 4 5 6 7 8 9 10Quantity

Output and Price Determination

0

D

MR

ATC

MC

MR=MCA=$94

EconomicProfit

Pm=$122

8-10

Page 11: 1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Misconceptions of Monopoly Pricing

• Not highest price

• Total profit

• Possibility of losses

8-11

Page 12: 1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Economic Effects of Monopoly

LO3

(a)

Purely competitive market

(b)

Pure monopoly

D D

S=MC MC

P=MC=Minimum

ATC

MR

Pc

Qc

Pc

Pm

QcQm

Pure competition is efficientMonopoly is inefficient

a

b

cd

8-12

Page 13: 1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Economic Effects of Monopoly

• Income transfer

• Cost complications

• Economies of scale

• X-inefficiency

• Rent-seeking expenditures

• Technological advance

8-13

Page 14: 1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Price Discrimination

• Price discrimination • Charging different buyers different

prices • Price differences are not based on cost

differences• Conditions for success:

• Monopoly power• Market segregation• No resale

LO4 8-14

Page 15: 1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Examples of Price Discrimination

• Business travel• Electric utilities• Movie theaters• Golf courses• Railroad companies• Coupons• International trade

LO4 8-15

Page 16: 1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Graphical Analysis

LO4

MC = ATC MC = ATC

Qb

Qs

Ps

Pb

P P

MRbMRs

Db

Ds

(a) Small businesses (b) Students

Economic profit

Economic profit

8-16

Page 17: 1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Monopoly and Antitrust Policy

• Antitrust laws• Break up the firm

• Regulate it• Government determines price and

quantity• Ignore it

• Let time and markets get rid of monopoly

LO5 8-17

Page 18: 1-1 Pure Monopoly Chapter 8 McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Global Perspective

Competition from Foreign Multinational Corporations

8-18


Chapter 12 Government Imperfections McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved

Chapter 02 Professional Standards McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter Mutual Funds McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 4

Chapter 7 Trade McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved

12 Cost Analysis McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter © 2008The McGraw-Hill Companies, Inc. All rights reserved. Creating Effective Organizations 17 McGraw-Hill/IrwinCopyright © 2008 by The McGraw-Hill

Economic Growth 8 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter 16 McGraw-Hill/IrwinCopyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved

Chapter 15 McGraw-Hill/IrwinCopyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved

11 Salesperson Compensation and Incentives McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter 4 Risk Assessment McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. SAMPLING Chapter 14

Computer Hardware Chapter 3 McGraw-Hill/IrwinCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

Elasticity 6 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Copyright © 2006. The McGraw-Hill Companies, Inc.McGraw-Hill/IrwinCopyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Flexible Budgets and

McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Confidence Intervals Chapter 8

Chapter 4 McGraw-Hill/IrwinCopyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved

McGraw-Hill/IrwinCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter One Managers and Managing McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter 3 McGraw-Hill/IrwinCopyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved

CHAPTER 12. MONOPOLY McGraw-Hill/IrwinCopyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter 5 McGraw-Hill/IrwinCopyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved

Consumer Behavior 9 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter 7. PRODUCTION McGraw-Hill/IrwinCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 7

Chapter 8 McGraw-Hill/IrwinCopyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved

Chapter 17 Auditors’ Reports McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved

McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. SURVEYS Chapter 10

Chapter 7 McGraw-Hill/IrwinCopyright © 2010 The McGraw-Hill Companies, Inc. All rights reserved

Chapter 8 Costs McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved

Chapter © 2008The McGraw-Hill Companies, Inc. All rights reserved. Foundations of Motivation 8 McGraw-Hill/IrwinCopyright © 2008 by The McGraw-Hill Companies,

Chapter Interest Rates McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 9

Competing in Foreign Markets McGraw-Hill/IrwinCopyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

Chapter © 2008The McGraw-Hill Companies, Inc. All rights reserved. Leadership 16 McGraw-Hill/IrwinCopyright © 2008 by The McGraw-Hill Companies, Inc. All

16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Wage Determination

Computer Hardware Chapter 3 McGraw-Hill/IrwinCopyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved