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PURE MONOPOLYPURE MONOPOLY

Pure monopoly is a type of market Pure monopoly is a type of market characterized by;characterized by;

1.1. a single seller or producer,a single seller or producer,

2.2. a unique product, with no close a unique product, with no close substitute,substitute,

3.3. the ability of the seller to ask any price it the ability of the seller to ask any price it wishes,wishes,

4.4. entry to the industry completely blocked entry to the industry completely blocked by legal, technological or economic by legal, technological or economic barriers, andbarriers, and

5.5. no need for non-price actions, except no need for non-price actions, except public relations or goodwill public relations or goodwill advertising. advertising.

Examples of pure monopolies are Examples of pure monopolies are not common because monopolies arenot common because monopolies areeither usually regulated or either usually regulated or prohibited altogether. Cases whereprohibited altogether. Cases wherea company has substantial amount of a company has substantial amount of monopoly power, but cannotmonopoly power, but cannotbe considered a pure monopoly, can be considered a pure monopoly, can easily be found. easily be found.

MONOPOLY UNIQUE MONOPOLY UNIQUE PRODUCTPRODUCT

A monopoly exists when a firm is the only A monopoly exists when a firm is the only producer of a given product. That product producer of a given product. That product is therefore unique to that firm. is therefore unique to that firm.

The product is unique in the sense that no The product is unique in the sense that no close substitutes are presently easily close substitutes are presently easily available to consumers. available to consumers.

- Such situation is rarely observed because - Such situation is rarely observed because products providing a similar service can products providing a similar service can usually be found in other industries usually be found in other industries orregions of the world. orregions of the world.

MONOPOLY POWER OVER PRICEMONOPOLY POWER OVER PRICE

A monopoly has extensive power over the A monopoly has extensive power over the price it may want to charge its customers. price it may want to charge its customers.

The monopolist is sometimes referred to The monopolist is sometimes referred to as a price maker. as a price maker.

A monopolist does not charge the highest A monopolist does not charge the highest possible price. Instead it charges the price possible price. Instead it charges the price for which its profits are the largest. for which its profits are the largest.

A monopolist does not set a price A monopolist does not set a price independently of the volume produced: independently of the volume produced: quite the contrary, price setting is quite the contrary, price setting is implemented by restricting output. implemented by restricting output.

MONOPOLY ENTRY BARRIERSMONOPOLY ENTRY BARRIERS

Monopoly exists when entry barriers Monopoly exists when entry barriers are present; these may be;are present; these may be;

- legal, from the ownership of a patent - legal, from the ownership of a patent or a copyright,or a copyright,- legal, from its appointment as public - legal, from its appointment as public utility for natural monopolies,utility for natural monopolies,- technological, from a secret method - technological, from a secret method of production,of production,- due to large size, age, or good - due to large size, age, or good reputation,reputation,

stemming from access to a stemming from access to a key resource (such as ore), key resource (such as ore),

or;or;

resulting from unfair tactics resulting from unfair tactics or unfair competition. or unfair competition.

UNFAIR COMPETITIONUNFAIR COMPETITION Various strategies used by firms to Various strategies used by firms to

eliminate competitors by forcing them eliminate competitors by forcing them into bankruptcy or preventing new into bankruptcy or preventing new firms from entering the industry, are firms from entering the industry, are referred to as unfair competition.referred to as unfair competition.

They may include; They may include; drastic under pricing of products, ordrastic under pricing of products, or

cornering of a resource market.cornering of a resource market.Most of these tactics have been Most of these tactics have been declared illegal in antitrust legislation. declared illegal in antitrust legislation.

MONOPOLY NON-PRICE MONOPOLY NON-PRICE ACTIONACTION

Since a monopolist is the only firm Since a monopolist is the only firm in the industry, it appears that there in the industry, it appears that there is no need for non-price action, such is no need for non-price action, such as advertising.as advertising.

However, advertising and other However, advertising and other non-price action are used as a form non-price action are used as a form of public relations and for the of public relations and for the purpose of avoiding customer purpose of avoiding customer antagonism. antagonism.

MONOPOLY DEMANDMONOPOLY DEMAND

The demand of a monopoly is The demand of a monopoly is downward sloping because downward sloping because the monopoly is the only firm the monopoly is the only firm in the market, and demand for in the market, and demand for most products is price most products is price sensitive. sensitive.

MONOPOLY MARGINAL REVENUEMONOPOLY MARGINAL REVENUE

Marginal revenue is the additional Marginal revenue is the additional revenue received for the last unit sold. revenue received for the last unit sold.

- Since the monopolist can sell one more - Since the monopolist can sell one more unit only by lowering the price on all the unit only by lowering the price on all the units sold, the marginal or additional units sold, the marginal or additional revenue is not constant but decreasing. revenue is not constant but decreasing.

- The marginal revenue is less than price at - The marginal revenue is less than price at any quantity. If the demand curve is a any quantity. If the demand curve is a straight line, the slope of marginal straight line, the slope of marginal revenue is twice the slope of the demand revenue is twice the slope of the demand curve. curve.

MONOPOLY DEMAND ELASTICITYMONOPOLY DEMAND ELASTICITY

The upper portion of the demand curve of The upper portion of the demand curve of a monopoly is elastic, and marginal a monopoly is elastic, and marginal revenue is positive for this region of revenue is positive for this region of output.output.

The lower portion of demand is inelastic, The lower portion of demand is inelastic, and marginal revenue is negative in that and marginal revenue is negative in that region. It follows that a monopolist wouldregion. It follows that a monopolist wouldnever want to be in the inelastic portion never want to be in the inelastic portion of its demand since it can increase of its demand since it can increase revenues by raising price. revenues by raising price.

MONOPOLY PROFITMONOPOLY PROFIT A monopoly finds its maximum profit A monopoly finds its maximum profit

by producing at a level of output by producing at a level of output where marginal revenue equals where marginal revenue equals marginal cost. (i.e. the intersection marginal cost. (i.e. the intersection of marginal revenue and marginal of marginal revenue and marginal cost curves). cost curves).

If it produces one less unit a profit is If it produces one less unit a profit is foregone (on the last unit it failed to foregone (on the last unit it failed to sell), and if it produces one more unit sell), and if it produces one more unit a decrease in profit is incurred (as a decrease in profit is incurred (as the marginal cost exceeds the the marginal cost exceeds the marginal revenue for that last unit). marginal revenue for that last unit).

MONOPOLY OPTIMUM QUANTITYMONOPOLY OPTIMUM QUANTITY

The profit of a monopoly is The profit of a monopoly is determined by first finding the determined by first finding the optimum quantity with the marginal optimum quantity with the marginal revenue equal to marginal cost rule. revenue equal to marginal cost rule.

After that, the unit price on the After that, the unit price on the demand curve and the unit cost on demand curve and the unit cost on the average total cost curve are the average total cost curve are found based on the optimum found based on the optimum quantity established first. quantity established first.

Monopoly Profit GraphMonopoly Profit Graph

The monopoly profit is the The monopoly profit is the difference between total revenue difference between total revenue and total cost. Total revenue is and total cost. Total revenue is represented as a rectangle with represented as a rectangle with price (on the demand curve) as its price (on the demand curve) as its height, and quantityheight, and quantity(determined by MR=MC) as it (determined by MR=MC) as it width. Total cost is a rectangle with width. Total cost is a rectangle with average unit cost (on average total average unit cost (on average total cost) as its height, and quantity as cost) as its height, and quantity as its width. The area by which total its width. The area by which total revenue exceeds total cost is the revenue exceeds total cost is the profit area. profit area.

MONOPOLY LOSSMONOPOLY LOSS

A monopoly seeks to maximize A monopoly seeks to maximize profits, and is capable of achieving profits, and is capable of achieving such a goal by controlling price and such a goal by controlling price and quantity.quantity.

However, should customer demand However, should customer demand decrease significantly, the decrease significantly, the monopolist will be content with monopolist will be content with minimizing loss (in the shortrun) and minimizing loss (in the shortrun) and may even be forced to close down. may even be forced to close down.

Monopoly Loss GraphMonopoly Loss Graph

MONOPOLY ECONOMIC EFFECTMONOPOLY ECONOMIC EFFECT

A monopoly form of market is highly A monopoly form of market is highly undesirable for our society because of the undesirable for our society because of the sizable loss of productive and allocative sizable loss of productive and allocative efficiency: efficiency:

the price paid is higher than in perfect the price paid is higher than in perfect competition and the quantity is smaller. competition and the quantity is smaller.

The monopoly underutilizes theThe monopoly underutilizes theresources for the production of a good resources for the production of a good wanted by society. The price charged is wanted by society. The price charged is much higher than the cost of additional much higher than the cost of additional resources used. However, economies of scale resources used. However, economies of scale and technological progress are possible. and technological progress are possible.

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