This document provides an overview of pure monopoly, including its key characteristics, profit maximization approach, economic effects, and comparisons to perfect competition. A pure monopoly is dominated by a single seller with significant barriers to entry. It faces a downward-sloping demand curve and sets price above marginal cost to maximize total profits. This results in a deadweight loss to society in the form of unused productive capacity. The document also discusses price discrimination, regulated monopolies, and examples like De Beers diamonds.

1. Chapter 10
Pure Monopoly
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter Objectives
• Characteristics of pure monopoly
• Profit-maximizing output and price
• Economic effects of monopoly
• Charging different prices in
different markets
10-2

3. Characteristics of Monopoly
1. Single seller

4. No close substitutes – unique
product

5. “Price maker”

6. Blocked entry

7. Reasons behind blocked Entry
Economical
Technological
Legal

8. 1.Economical barrier for blocked
entry in Pure Monopoly
Example

9. 2. Technological barrier for
blocked entry in Pure Monopoly
Example

10. 3.Legal barrier for blocked entry
in Pure Monopoly
Up to late 1990s

11. Non price competition

12. Non price competition
• Two types of product a Monopolist have.
Either
“ Standardized or Differentiated ”
Products

13. Standardized
• As natural gas

14. Differentiated

15. Examples of Monopoly
1. Pure Monopoly
Regulated or natural monopolies
Electricity

16. Examples of Monopoly
Near monopolies
have about 80 % share of Market as
Intel
De Beers

17. Examples of Monopoly
• Geographic monopolies
–Professional sport teams
• Dual objectives of study
For understanding two other market models
Oligopoly and Monopolistic Competition. Because
these two markets combine in different degrees
and characteristics of pure competition and pure
Monopoly.

18. Barriers to Entry
• Economies of scale
• Legal barriers to entry
–Patents
–Licenses
• Ownership or control of essential
resources
• Pricing and other strategic barriers to
entry

19. Monopoly Demand

20. “ After discussing the sources, in
order to understand fully pure
Monopoly we have to analyze the
Price and output decision of Pure
Monopoly”

21. Monopoly Demand
• Assumptions:
1. Monopoly status is secure
2. No government regulation
3. Single-price monopolist
• Face down-sloping demand
–Entire market demand

22. Downward sloping demand has
Three Implications

26. Price and Marginal Revenue
1. Marginal revenue is less than price
• A monopolist is
selling 3 units at $142
$142 132
• To sell 4, price must 122
Loss = $30
be lowered to $132 112 D
• All customers 102
Gain = $132
must pay the same 92
price 82
• TR increases $132
minus $30 (3x$10)
0 1 2 3 4 5 6
10-26

27. Price and Marginal Revenue
Marginal revenue is less than price
• A monopolist is
selling 3 units at
$142
• To sell 4, price must $142
be lowered to $132 132
• All customers 122
must pay the same 112 Loss = $30 D
price
102
• TR increases $132 Gain = $132
minus $30 (3x$10) 92
• $102 becomes a 82
point on the MR
curve MR
• Try other prices to
determine other
0 1 2 3 4 5 6
MR points
The Constructed Marginal Revenue Curve
Must Always Be Less Than the Price

28. Down-Sloping Demand
• Marginal revenue < price
–To increase sales, must lower price
• Firm is a price maker
–Choose P,Q combination
• Operate in the elastic region
–Marginal revenue > 0
–Total-revenue test (recall)

29. Difference between pure
competition and monopoly
• For a competitive firm: P = MR = MC.
• For a monopoly firm: P > MR = MC

32. Profit Maximization
• Output-price determination
–Marginal revenue marginal cost rule
–Same cost definitions
• No supply curve
10-32

34. Monopoly Revenue and Costs
Revenue Data Cost Data
(2) (3)
(1) Price Total (4) (5) (6) (7) (8)
Quantity (Average Revenue Marginal Average Total Cost Marginal Profit (+)
Of Output Revenue) (1) X (2) Revenue Total Cost (1) X (5) Cost or Loss (-)
0 $172 $0 ] $100 ] $90 $-100
$162
1 162 162 ] $190.00 190 ] 80 -28
142
2 152 304 ] 135.00 270 ] 70 +34
122
3 142 426 ] 113.33 340 ] 60 +86
102
4 132 528 ] 100.00 400 ] 70 +128
82
5 122 610 ] 94.00 470 ] 80 +140
62
6 112 672 ] 91.67 550 ] 90 +122
42
7 102 714 ] 91.43 640 ] 110 +74
22
8 92 736 ] 93.75 750 ] 130 -14
2
9 82 738 ] 97.78 880 ] 150 -142
-18
10 72 720 103.00 1030 -310
Can you See Profit Maximization?
10-34

35. Monopoly Revenue and Costs
Demand and Marginal-Revenue Curves
Elastic Inelastic
$200
150
Price
100
50
MR D
0 2 4 6 8 10 12 14 16 18
Total-Revenue Curve
$750
Total Revenue
500
250
TR
0 2 4 6 8 10 12 14 16 18
10-35

36. Profit Maximization
$200
Price, Costs, and Revenue 175
MC
150
Pm=$122
125
Economic
Profit ATC
100
75
A=$94 D
50
MR=MC
25
MR
0 1 2 3 4 5 6 7 8 9 10
Quantity

37. Misconceptions
• Not the highest price
• Total, not unit, profit
• Possibility of losses
10-37

38. Loss Minimization
Price, Costs, and Revenue
MC
ATC
A Loss
Pm
AVC
V
D
MR=MC
MR
0 Qm
Quantity
10-38

39. Economic Effects
Purely Pure
Competitive Monopoly
Market
S=MC MC
Pm b
P=MC=
Pc Minimum Pc c
ATC
a
D D
MR
Qc Qm Qc
Pure competition is efficient
Monopoly is inefficient
10-39

40. Economic Effects
• Pure competition is efficient
–Productive efficiency
–Allocative efficiency
–CS+PS maximized
• Monopoly is inefficient
–Charge P>MC
–Deadweight loss
• Income transfer
10-40

41. Cost Complications
• Economies of scale
–Simultaneous consumption
–Network effects
• X-inefficiency
–Lowest ATC not achieved
• Rent seeking behavior
• Technological advance
–More likely with monopoly?
10-41

42. Price Discrimination
• Three forms
– Charge each customer max
willingness to pay
– Charge one price for first unit and a
lower price for subsequent units
– Charge different customers
different prices
10-42

43. Price Discrimination
• Conditions
– Monopoly power
– Market segregation
– No resale
• Examples
– Airfares
– Electric utilities
– Theaters & golf courses
10-43

44. Regulated Monopoly
• Natural monopolies
• Rate regulation
• Socially optimum price
P = MC
• Fair return price
P = ATC
10-44

45. Regulated Monopoly
Dilemma of Regulation
Monopoly
Price
Price and Costs (Dollars)
Pm
Fair-Return
Price
Socially
f Optimal
Pf a Price
ATC
Pr
r MC
MR D
b
0 Qm Qf Qr
Quantity
10-45

46. De Beers Diamonds
• 66 years of monopoly pricing
–Independent producers went along
• Mid-2000 abandoned monopoly
–New discoveries
–Independent producers withdrew
–Political considerations
• New strategy
–“The diamond supplier of choice”
10-46

47. Key Terms
• pure monopoly
• barriers to entry
• simultaneous consumption
• network effects
• X-inefficiency
• rent-seeking behavior
• price discrimination
• socially optimal price
• fair-return price
10-47

48. Next Chapter Preview…
Monopolistic
Competition
and Oligopoly
10-48