Pure Monopoly


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Pure Monopoly

  1. 1. “Pure Monopoly”
  2. 2. “PURE MONOPOLY” A market in which one company has control over the entire market for a product, usually because of a barrier to entry such as a technology only available to that company.
  3. 3. CHARACTERISTICS OF PURE MONOPOLY Single Seller No Close Substitute Price Maker Blocked Entry
  4. 4. “ADVANTAGES” Take advantage of economies of scale and scope. Provides incentive for innovation.
  5. 5. “Disadvantages” Limits options to consumers (and we pay a higher price). Profit and losses don’t send proper signals or send proper incentives. Rent seeking behavior (rent is another word for monopoly profit), spending money to obtain a monopoly position.
  6. 6. HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISION Monopoly • Is the sole provider • Faces a downward-sloping demand curve • Is a price maker • Reduces price to increase sales Competitive Firm • Is one of many producers • Faces a horizontal demand curve • Is a price taker • Sells as much or as little at same price
  7. 7. Assumptions Patents, economies of scale, or resource ownership secure the monopolist's status. No unit of government regulates the firm. The firm is a single-price monopolist; it charges the same price for all units of output.
  8. 8. Marginal revenue is less than price The monopolist is a price maker The monopolist sets prices in the elastic region of demand
  9. 9. P, Cost Demand and MR for a Monopolist PED>1 P1 PED=1 P 2 At which price/output combination will a monopolist produce? PED<1 P3 D=AR=P Total Revenue Q1 Q2 MR Q 3 Q TR
  10. 10. Cost data Assumption - a pure monopolist hires resources competitively and has the same technology as a purely competitive firm. MR=MC rule A monopolist seeking to maximize total profit will employ the same rationale as a profit-seeking firm in a competitive industry; they will produce at the point where MR = MC. •Profit maximizing price: Find MC= MR and draw a vertical line up to the demand curve. •Draw a horizontal line. This is the price they set.
  11. 11. P, Cost P1 Economic Profit M C ATC ATC1 D=AR=P Q1 MR Q
  12. 12. No monopoly supply curve No unique relationship between price and quantity supplied for a monopolist → no supply curve. Because the monopolist does not equate marginal cost to price, it is
  13. 13. Misconceptions concerning monopoly pricing  Not Highest Price Misconception: Monopolists will charge highest price possible because they can manipulate output & price Monopolies still face consumer demand. If the price is too high, consumers won't buy their products, and profits are decreased. Although there are many prices above Pm, monopolists don't charge at those prices because they would yield a smaller-than-maximum total profit. (High prices would potentially reduce sales and total revenue too severely to offset any decrease in total cost) Monopolist seek maximum total profit, NOT the maximum price  Total, Not Unit, Profit Output level may not be at maximum per-unit profit, but additional sales make up for lower unit profit, which in turn maximizes total profit.
  14. 14. P, Cost Pure Monopolist Experiencing Losses LOSS MC ATC ATC1 P1 D=AR=P Q1 Q MR
  15. 15. Price Discrimination The practice of selling a specific product at more than one price when the price differences are not justified by cost differences. Ways of Price Discriminating 1. Charge each person his or her max willing-topay price 2. Charge more for the first set of the product, then less for each additional product bought by the same consumer 3. Charge different customers different price based on factors such as race, gender, age, abilities etc.
  16. 16. Price discrimination Is possible when the following conditions are realized: Monopoly Power Market Segregation No Resale Little or No Cost Difference
  17. 17. Perfect Price Discrimination to charge what each consumer is willing to buy. Although perfect price discrimination is unlikely to
  18. 18. P, Co st P, Co st Single Price Monopolist Earning Profits Price Discriminating Monopolist M MC Economic C Profit Economic Profit ATC ATC P1 ATC1 ATC 1 D=AR= P Q1 Q MR MR=D=AR=P Q1 Q
  19. 19. Price Determination MR = MC Rule  Monopolies maximize total profit by producing at a level of output where MR = MC  This is the same as a purely competitive industry  At this level of output, the difference between TR and TC is also at its greatest
  20. 20. Consequences of Price Discriminating Monopolies 1. More profit 2. More output 3. Lowest price will = MC 4. Zero consumer surplus (when perfect) 5. Creates allocative efficiency 6. No productive efficiency because P> min ATC 7. MR is reunited with DARP because the firm no longer has to decrease the
  21. 21. Aizell Bernal Dianne De Guzman Sheryl Tolentino Shara Jane Clayton Jean Marie Canona Kate Garcia Jeradie Joves Miguel Apruebo Patrizia Louiz Reyes Allan Roi Mapa