1. 24
C H A P T E R
Pure Monopoly

2. FOUR MARKET MODELS Pure Monopoly: Single Seller No Close Substitutes
Price Maker
Blocked Entry
Nonprice Competition
Pure
Competition
Monopoly
Monopolistic
Oligopoly

3. BARRIERS TO ENTRY Economies of Scale Legal Barriers to Entry
The Natural Monopoly Case
Legal Barriers to Entry
Patents / Licenses
Ownership or Control of Essential Resources
- Pricing and Other Strategic barriers to entry

4. Market Demand Curve is the Firm’s Demand Curve
MONOPOLY DEMAND
3 Basic Assumptions:
1. Monopoly Status is Secure
2. No Governmental Regulation
3. Firm Charges the Same Price for all Units Sold
Market Demand Curve is the Firm’s Demand Curve

5. The monopolist sets the price in the elastic region of demand
In the elastic region of demand lower price leads to higher total revenue
The monopolist avoids the inelastic region in the demand curve.

6. In competitive markets:
Demand is perfectly elastic demand
Each unit sold will add the amount of constant product price to total revenue.
P = MR(constant)
In pure monopoly:
The monopolist is the market
The demand is the market demand
The demand is downward sloping
Qd increases as P decreases

7. MONOPOLY REVENUES & COSTS
Revenue Data
Quantity of
Output
Price
(Average
Revenue)
Marginal
Revenue 1 2 3 4 5 6 7 8 9 10
$172
162
152
142
132
122
112
102 92 82 72
$162
142
122
102 82 62 42 22 2
- 18

8. MONOPOLY REVENUES & COSTS
Revenue Data
Quantity of
Output
Price
(Average
Revenue)
Marginal
Revenue 1 2 3 4 5 6 7 8 9 10
$172
162
152
142
132
122
112
102 92 82 72
Note that P > MR
(except 1 unit)
$162
142
122
102 82 62 42 22 2
- 18

9. $ MC D MR Q

10. $ MC
MC = MR MR D MR Q* Q

11. $ MC
MC = MR Pm MR
Recall
P>MR! D MR Q* Q

12. $ MC
MC = MR Pm MR
Recall
P>MR! D MR Q* Q

13. Note that ATC minimum = (MR=MC)$ MC Pm
ATC MR D MR Q

14. Profit maximization rule of monopolist
MR = MC
And MC ≠ P
Note that price > MR
Loss minimization rule

15. The monopolist has no supply curve (MC ≠ P)
The monopolist equates MR and MC to determine output
The monopolist does not set the highest possible price. Monopolist goal is maximum profit not maximum price.
Higher price may lead to less profit.

16. MONOPOLY REVENUES & COSTS
Revenue Data
Cost Data
Quantity of
Output
Price
(Average
Revenue)
Average
Total
Cost
Profit + or
loss -
Total
Revenue
Marginal
Revenue
Total
Cost
Marginal
Cost x
$172 =
$ 0 -
$100 =
- $100

17. MONOPOLY REVENUES & COSTS
Revenue Data
Cost Data
Quantity of
Output
Price
(Average
Revenue)
Average
Total
Cost
Profit + or
loss -
Total
Revenue
Marginal
Revenue
Total
Cost
Marginal
Cost 1
$172
$172
162
$ 0
$ 0
162
$100
190
$100
- $100
- $100
- 28 ]
$162 ] 90 x = -
$190.00 =
MR = $162 – 0 = $162
MC = $190 – 100 = $90
MR > MC
Loss Improvement
from -$100 to -$28
Check next unit of
output!

18. MONOPOLY REVENUES & COSTS
Revenue Data
Cost Data
Quantity of
Output
Price
(Average
Revenue)
Average
Total
Cost
Profit + or
loss -
Total
Revenue
Marginal
Revenue
Total
Cost
Marginal
Cost 1 2 3 4 5 6 7 8 9 10
$172
162
152
142
132
122
112
102 92 82 72
$ 0
162
304
426
528
610
672
714
736
738
720
$100
190
270
340
400
470
550
640
750
880
1030
- $100
- 28
+ 34
+ 86
+ 128
+ 140
+ 122
+ 74
- 14
- 142
- 310 ]
$162
142
122
102 82 62 42 22 2
- 18 ] 90 80 70 60
110
130
150
$190.00
135.00
113.33
100.00
94.00
91.67
91.43
93.73
97.78
103.00

19. Can you see profit maximization? MR > = MC
MONOPOLY REVENUES & COSTS
Revenue Data
Cost Data
Quantity of
Output
Price
(Average
Revenue)
Average
Total
Cost
Profit + or
loss -
Total
Revenue
Marginal
Revenue
Total
Cost
Marginal
Cost
Can you see profit
maximization? 1 2 3 4 5 6 7 8 9 10
$172
162
152
142
132
122
112
102 92 82 72
$ 0
162
304
426
528
610
672
714
736
738
720
$100
190
270
340
400
470
550
640
750
880
1030
- $100
- 28
+ 34
+ 86
+ 128
+ 140
+ 122
+ 74
- 14
- 142
- 310
MR > = MC ]
$162
142
122
102 82 62 42 22 2
- 18 ] 90 80 70 60
110
130
150
$190.00
135.00
113.33
100.00
94.00
91.67
91.43
93.73
97.78
103.00