Price and Output Determination: Pure Monopoly

I. Introduction


A. Four Product Market Models

1. Competitive Market (Ch. 10)
2. Monopoly (Ch. 11)
3. Monopolistic Competition (Ch. 12)*
4. Oligopoly (Ch. 12)


B. General Outline for Each Model

1. Characteristics and Examples
2. Nature of the Demand Curve
3. Short Run Equilibrium (Profit Max.)
4. Long Run Equilibrium and Efficiency
5. Other Issues


II. Characteristics

A. NUMBER OF FIRMS: single firm
B. TYPE OF PRODUCT: unique product, no close substitutes
C. CONTROL OVER PRICE: "price makers"
D. EASE OF ENTRY: blocked entry
E. NONPRICE COMPETITION: public relations


III. Examples / Importance


IV. Barriers to Entry


A. Importance of Barriers

B. Types of Barriers

1. economies of scale: costs

a) graphically
b) rationale
c) natural monopolies

2. legal barriers

a) patents
b) licenses

3. ownership of essential raw materials

4. pricing and other strategic barriers


V. Price and Output Determination: Benefit-Cost Analysis


A. Monopoly Demand

1. firm's demand = market demand (demand is downsloping)
2. P > MR

a. graphically
b. why?

3. price maker
4. price elasticity


B. Price and Output Determination


1. goal: profit maximization
2. benefit-cost analysis 2 steps (graphically)

a) find best quantity where MR = MC
b) product only if AR > AVC


C. Profits? (graphically)


1. profit maximizing case economic profits
2. loss minimizing case
3. shut down case
4. normal profit


D. Misconceptions Concerning Monopoly Pricing


1. not highest price
2. total, not unit, profits
3. losses


E. Quick Quiz


VI. Price and Output Determination TC - TR Approach


VII. Monopoly Firms and Long Run Equilibrium


VIII. Monopoly Firms and Efficiency


A. Competitive Firms and Efficiency (review)

1. allocative efficiency: P = MC
2. productive efficiency: P = MC = ATC


B. Assume Identical Costs


C. Monopoly


1. allocative inefficiency: P >MC


a) underallocation of resources smaller output than competitive markets
b) higher prices than competitive markets


2. productive inefficiency

a) not producing at minimum ATC
b) cost complications

1) natural monopoly
2) X-inefficiency
3) monopoly preserving expenditures
4) dynamic efficiency

(a) competitive model
(b) monopoly model

(1) means
(2) incentives?
(3) a mixed picture

3. inequities (income distribution)


IX. Price Discrimination


A. Definition

B. Examples/Illustrations

C. Conditions

1. price maker (monopoly power)
2. ability to prevent resale
3. ability to segregate buyers according to their price elasticity of demand

D. Consequences (graphically)

1. more profits
2. more production


X. Regulated Monopoly: Rate Regulation
(pp. 230-232, 392-395)


A. Why rate regulation instead of antitrust?

1. definition: antitrust
2. natural monopoly
3. graphically


B. Why government gets involved

1. to improve allocative efficiency: "public interest "
2. political reasons: legal cartel theory


C. How the government regulates rates (prices)

1. P = MC: socially optimum price

a) graphically
b) achieves allocative efficiency
c) but results in a loss for the firm
d) government could subsidize or use AC pricing

2. P = ATC: "fair" return price

a) graphically
b) some inefficiency
c) but normal profits earned no losses


D. Problems (p. 393)

1. costs and inefficiency
2. commission deficiencies
3. regulating competitive industries