Pure Monopoly Chapter 11 11/8/2018

Monopoly Characteristics: Single seller No close substitutes Price maker Blocked entry Nonprice competition Characteristics: A single firm is the sole producer of a specific good or the sole supplier of a service; the firm and the industry are synonymous. A pure monopoly’s product is unique (no close substitutes). The consumer who chooses not to buy the monopolized product must do without it. Pure monopolist has considerable control over price. They are a price maker as opposed to a price taker. Pure monopolists have no immediate competitors because certain barriers keep potential competitors from entering the industry. These barriers may be economic, technological, legal, or some other type. The product produced by a pure monopolist may be either standardized or differentiated. Monopolists that have standardized products engage mainly in public relations advertising, whereas those with differentiated products sometimes advertise their products’ attributes. 11/8/2018

Examples of Monopoly Examples are relatively rare Government owned or regulated utility companies These are called natural monopolies 11/8/2018

Barriers to entry Factors that prohibit firms from entering an industry are called barriers to entry. Strong barriers to entry effectively block all potential competition. Somewhat weaker barriers may permit oligopoly, a market structure dominated by a few firms. 11/8/2018

Economies of Scale Serves as an entry barrier in a pure monopoly New firms are unable to realize the cost savings of a monopolist 11/8/2018

Legal Barriers to Entry Patents Licenses 11/8/2018

Patents Exclusive right of an inventor to use their invention for 20 years without competition This serves as a reward for developing a product that is in demand 11/8/2018

Licenses Government limits entry into an industry through licensing i.e. the federal communications commission only allows so many radio & t.v. stations in a specific area 11/8/2018

Monopoly Demand Demand curve Down sloping appearance Supply curve for firm and industry is same thing since there is only one firm 3. Because the pure monopolist is the industry, its demand curve is the market demand curve. And because market demand is not perfectly elastic, the monopolist’s demand curve is downsloping. 11/8/2018

MR<Price Sales can only increase by charging a lower price Lower price applies not only to the extra output sold but also to all prior units of output 11/8/2018

Price Maker Price is determined by how many products they want to sell Price is set in the “elastic” portion of the demand curve Complete table 11.1 with the class 3. Chapter 7…when demand is elastic, a decline in price will increase total revenue and vice versa. Monopolists will never choose a price-quantity combination where price reductions cause total revenue to decrease. 11/8/2018

Output & Price Determination Cost Data Still competes for resources Employs same technology as pc firm MR=MC Rule -Profit-Maximizing Point Same as competitive industry When a firm chooses their price-quantity combination, they look at production costs when making their decision. 2. It will produce up to the output at which mr=mc (look at table 11.1 columns 4 & 7) Do figure 11.4 on page 212…look at profit-maximizing output (mr=mc) 11/8/2018

Misconceptions Not highest price Total, not unit, profit Possibility of losses by a monopolist The monopolist seeks maximum total profit not maximum price 3. Monopolies are not immune to changes in consumer taste that reduce demand for its product 11/8/2018

Quantity Price TR (P x Q) MR ATC TC (ATC x Q) MC Profit or Loss (TR-TC) 172 --- 100 ---- 1 162 190 2 152 135 3 142 113.33 4 132 5 122 94 6 112 91.67 7 102 91.43 8 92 93.75 9 82 97.78 10 72 103 11/8/2018

Simultaneous consumption A product’s ability to satisfy a large number of consumers at the same time. i.e. dell computers needs to produce a personal computer for each customer, but Microsoft needs to produce its windows program only once. Then, at a very low marginal cost, microsoft delivers its program by disk or internet to millions of consumers. Production costs for microsoft are much lower than for dell computer. 11/8/2018

X-Inefficiency Occurs when a firm’s actual cost of producing any output is greater than the lowest possible cost of producing it. See Figure 11.7 page 217. Why is x-inefficiency allowed to occur if it reduces profits??? Managers may have goals, such as corporate growth, an easier work life, avoiding business risks, that conflict with minimizing costs. It also may arise because a firm’s workers are poorly motivated or ineffectively supervised. 11/8/2018

Rent-Seeking Behavior Ability to earn rent on a resource that you own If your competitor has to have the resource, they have no alternative to buy it from you. 11/8/2018

Price Discrimination The practice of selling a specific product at more than one price when the price differences are not justified by cost differences. Monopolists can increase their profit by charging different prices to different buyers. 11/8/2018

Conditions Price discrimination is possible when the following conditions are realized. Monopoly power Market segregation No resale Not all sellers are able to engage in price discrimination. Monopoly power- the seller must be a monopolist, or at least, possess some degree of monopoly power (ability to control output & price) Market segregation- seller must be able to segregate buyers into different classes, each of which has a different willingness to pay for the product. Original purchaser cannot resell the product or service. Example of price discrimination: airlines charge high fares to traveling executives, whose demand for travel is inelastic. 11/8/2018

Socially optimal price Price that achieves allocative efficiency Government establishes a price ceiling to prevent firms from taking advantage of consumers 11/8/2018

Fair-Return Price Socially optimal prices may lead to losses by a firm The fair-return price should fall on the firm’s ATC curve Do figure 11.9 for class 11/8/2018