no need for non-price actions, except public relations or goodwill advertising.
Examples of pure monopolies are not common because monopolies are either usually regulated or prohibited altogether. Cases where a company has substantial amount of monopoly power, but cannot be considered a pure monopoly, can easily be found.
Monopoly exists when entry barriers are present; these may be;
- legal, from the ownership of a patent or a copyright, - legal, from its appointment as public utility for natural monopolies, - technological, from a secret method of production, - due to large size, age, or good reputation,
The upper portion of the demand curve of a monopoly is elastic, and marginal revenue is positive for this region of output.
The lower portion of demand is inelastic, and marginal revenue is negative in that region. It follows that a monopolist would never want to be in the inelastic portion of its demand since it can increase revenues by raising price.
A monopoly finds its maximum profit by producing at a level of output where marginal revenue equals marginal cost. (i.e. the intersection of marginal revenue and marginal cost curves).
If it produces one less unit a profit is foregone (on the last unit it failed to sell), and if it produces one more unit a decrease in profit is incurred (as the marginal cost exceeds the marginal revenue for that last unit).
The monopoly profit is the difference between total revenue and total cost. Total revenue is represented as a rectangle with price (on the demand curve) as its height, and quantity (determined by MR=MC) as it width. Total cost is a rectangle with average unit cost (on average total cost) as its height, and quantity as its width. The area by which total revenue exceeds total cost is the profit area.
A monopoly form of market is highly undesirable for our society because of the sizable loss of productive and allocative efficiency:
the price paid is higher than in perfect competition and the quantity is smaller.
The monopoly underutilizes the resources for the production of a good wanted by society. The price charged is much higher than the cost of additional resources used. However, economies of scale and technological progress are possible.