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Pure Monopoly by dffhrtcv3


									Pure Monopoly

        Chapter 10
Chapter Overview
   Identify the characteristics of pure
   How does pure monopoly establish its
    profit maximizing output and price?
   What is the economic efficiency of pure
   Why might a monopolist charge various
    prices in different markets?
10.1 Introduction to Pure
   A pure monopoly exists when there is only 1
    producer of a product with no close
       Characterisitics: (and examples; pure & near)
            The single producer and the industry are the same
            No close substitutes
            Price maker; monopolist controls total output and price
            Certain barriers exist to keep competition out; economic,
             technological, legal or other. Totally blocked entry
            Standarized (mainly PR) or differeniated (adv) monopoly;
10.2 Barriers to Entry
   See Figure 10.1
   Economies of Scale serve as a barrier to
    entry because a declining long-run ATC
    curve over a wide range of output
    quantities indicates extensive
    “economies of scale”
   Financial prohibitions
10.2 Barriers to Entry
10.2 Barriers to Entry
   Legal barriers to entry
       Patents: exclusive right of an inventor to
        use, or to allow another to use, her or his
        invention (20 years per patent)
       Patents serve as a financial incentive for
        more patent research
       Licenses: government controlled rights of
10.2 Barriers to Entry
   Barriers of entry other than legal:
       Control of a resource: Alcoa, Intern’l Nickel
        Company, local sports franchise
       Pricing and other strategies: price slashing,
        advertising, or other means; Microsoft,
10.3 Monopoly Demand
   Assumptions for our Monopoly:
       Our status as a monopoly is secure
       No gov’t regulates the firm
       A single price monopoly
   A monopolist’s demand curve is not like a
    pure competition seller (which faces a
    perfectly elastic demand curve for the firm)
   A monopolist’s demand curve is a MARKET
    demand curve, therefore it is downward
    10.3 Monopoly Demand
        3 implications of a downward sloping demand
         curve for a monopoly:
    1.     A monopoly can increase sales only by charging a
           lower price; thus MR is less than Price (AR) for
           every level of output except the first one (See
           Figure 10.2)
    2.     Monopolist is a “PRICE MAKER” by changing Market
    3.     A monopolist will NEVER choose a PQ combination
           where price reductions cause TR to decrease (See
           Figure 10.3) MR always below D
10.3 Monopoly Demand
   A monopolist’s firm and industry
    demand curve are one and the same

   See Table 10.1 and Figure 10.2
10.4 Output & Price Determination

   A monopolist will produce up to the
    point at which MR=MC (or TC=TR)
   See Figure 10.4
   Remember Hawks’ Nobel Formula!
   A Monopolist has NO supply curve!
    (Monopolist does not equate MC to P)
10.4 Output & Price Determination

   Misconceptions Concerning Monopoly
       Monopolist seeks maximum Total Profit,
        not maximum price
       Monopolist is not guaranteed profit
            Change in tastes for product or service, &
             increasing resource costs
            See Figure 10.5
10.5 Economic Effects of
   Price, Output and Efficiency
       In a perfectly competitive market, the supply
        curve is the sum of all individual firms MC curves;
        in a pure monopoly there is no supply curve only 1
        MC curve.
       Therefore; the Ep of a perfectly competitive firm
        (as represented by D & S intersecting) also
        represents allocative and productive efficiencies.
       In a pure monopoly there is no Ep; thus
        productive and allocative efficiencies do not exist.
10.5 Economic Effects of
   Price, Output and Efficiency continued
       See Figure 10.6
       Notice the area shaded between points,
        a,b,c. This shaded area represents the
        “deadweight” area to society.
       The deadweight area equals the consumer
        and producer surpluses that existed at a
        competitive price, but not the monopolist’s
10.5 Economic Effects of
   Monopolists may not incur the same
    costs as a purely competitive producer:
    there are 4 reasons for this –
       Economies of scale
       X-inefficiencies
       Monopoly-preserving expenditures
       Very long run perspective
10.5 Economic Effects of
   Economies of scale
       Market demand may not support a large
        number of competing firms
       simultaneous consumption - Dell
        Computers (one computer at a time) and
        Microsoft (one system for all)
       Microsoft’s MC are so low, its ATC of its
        output decreases with each new buyer
       Network effect benefits – Microsoft
10.5 Economic Effects of
   X-inefficiencies
       See Figure 10.7
       Why do x-inefficiencies exist?
            Poor management decisions, principal-agent
             problem, poor worker motivation or ineffective
             supervision, reliance on “rules of thumb”
             instead of real cost/revenue decisions
            No competition for monopolies
10.5 Economic Effects of
   Rent-seeking expenditures
       The transfer of income or wealth to a particular
        firm or resource supplier at someone else’s, or
        even society’s expense.

   Technological Advances
       In the very long run firms can reduce their costs
        through the discovery & introduction of new
        technology; however, monopolists do not tend to
        expend for research and development because
        they have no competitors. (the reverse may be
        true to repel competitors)
10.5 Economic Effects of
   Assessment & Policy Options
       Monopolies are limited by law and
        advances in technology
            US Postal Service (fax machines, couriers,
             email, etc.)
            Cable TV (direct TV and internet TV)
            Foreign competition
            Patents expire
10.6 Price Discrimination
   See Figure 10.8
   This figure demonstrates the multiple pricing
    monopolist can do.
   Given the software is sold to students one
    student at a time, a lower price will generate
    more sales; whereas, a higher price can be
    charged to small businesses because they
    have a more inelastic demand for this
    software than students do
10.6 Price Discrimination
   Conditions for Price Discrimination
       Seller must have monopoly power
       Market segregation (ususally based on
        consumer elasticities)
       No resale (prevents Black Market options)

   Examples of Price Discrimination
10.7 Regulated Monopoly
   Legal monopolies in the US are
    regulated, and sometimes portions of
    the regulated monopoly are broken off,
    as in long-distance phone servers, cable
    TV, etc.
   See Figure 10.9
       Socially Optimal Price: P = MC
       Fair-Return Price: P = ATC
Chapter Summary
   What are the distinctive characteristics of a
   How does a monopoly realize profit
   How does efficiency relate to a monopoly?
   Demonstrate a monopolist receiving an
    economic profit; economic loss
   What benefits are there to price
    discrimination for a monopolist

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