3. “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.
6. “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.
7. 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
8. 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.
9. Marginal revenue is less
than price
The monopolist is a price
maker
The monopolist sets
prices in the elastic
region of demand
10. 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
11. 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.
14. 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.
16. 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.
17. Price discrimination
Is possible when the following
conditions are realized:
Monopoly Power
Market Segregation
No Resale
Little or No Cost Difference
19. 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
20. 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
21. 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
22. 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
