Pure Monopoly The Seller’s Delight The Opposite End of the Spectrum • • • • Pure Competition Monopolistic Competition Oligopoly Monopoly When do we deal with Monopolies? • A Monopoly is from the Greek monos, which means single or alone. • There is a sole firm, alone to reap all of the profits and provide the product or service. • Often industries start with a monopoly. Such as Microsoft (Software), Bell (Telecom.), Bayer (Aspirin and other drugs). Pure Monopoly Exists When… • Single Seller: Only game in town. The firm and the industry can often be synonymous. • No Close Substitutes: unique product that you would have to do without if you didn’t buy it. • Price-Maker: If you control the supply, you can manipulate price. Demand curve still exists. • Blocked Entry: Economic, tech., legal, or geographic. Barriers prevent competition. The Barriers to Entry: Maintaining a Monopoly • If there are profits to be had, new businesses would enter the industry unless they are being prevented in some way. 1) Economies of Scale: Declining ATC with increased firm size. For some large firms, Long-Run ATC is too low for most to compete. (Procter & Gamble NYSE:PG) The Barriers to Entry: Maintaining a Monopoly 2) Legal Barriers: Patents The exclusive right to an invention, generally 17 years. (Johnson & Johnson: JNJ) Licenses The government can legally restrict others from operating or competing without a license to do so. (Bell Canada Enterprises: BCE) The Barriers to Entry: Maintaining a Monopoly 3) Ownership of Essential Resources: A company might own the resource required to make the product. (De Beers Diamond Company) 4) Pricing or Strategic Barrier: Heavy pricing discounts can drive competition out of business, or heavy advertising can effectively eliminate other brands. (Coca-Cola: KO or Pepsi: PEP) Monopoly and Demand • In Pure Competition, demand is perfectly elastic because the seller has no influence on the overall market. • The Monopolist is the Industry, they are the sole supplier. So they must face a downward sloping demand curve. • Therefore, MR is not Demand. Marginal Revenue < Price • A Monopolist must reduce its price to increase sales. • Each Marginal Unit sold increases revenue by an amount equal to its own price, but less the sum of the price cuts needed on all previous units. • This means that Marginal Revenue is < Price or (Average Revenue) and below Demand. 10-3 The Monopolist is a Price Maker • In deciding what output to produce, the Monopolist is deciding what price to charge. • This is true because the Monopolist is the industry and, therefore, determines Supply. • In Pure Competition, what happens when the business tries to raise the price by reducing its output? The Monopolist Sets Prices in the Elastic Region of Demand • When demand is elastic, a decline in price increases TR. • When demand is inelastic, a decline in price reduces TR. • A profit maximizing firm wants to avoid inelastic price reductions. Less Total Revenue and Higher Total Costs means Less Profit.