Overview
This lecture covers the concept of pure monopoly, including its characteristics, sources, pricing, demand, efficiency, and regulatory issues.
Definition and Characteristics of Pure Monopoly
- A pure monopoly exists when one firm is the sole producer of a product with no close substitutes.
- Monopolies have significant control over price due to lack of competition.
- High barriers to entry protect monopoly status.
Sources and Examples of Monopoly
- Barriers include economies of scale, legal restrictions (patents, licenses), ownership of resources, and pricing strategies.
- Examples: local utilities, patented drugs, and some technological platforms.
Monopoly Demand and Revenue
- Monopoly faces the market demand curve, which is downward sloping.
- Marginal revenue (MR) is less than price, unlike perfect competition.
- To sell more units, the monopolist must lower the price for all units sold.
- Total revenue increases, peaks, then decreases as price falls.
Output and Price Determination
- Profit maximization occurs where MR equals marginal cost (MC).
- Price is set above MC, leading to higher prices and lower output than in competitive markets.
Misconceptions About Monopoly Pricing
- Monopolists do not charge the highest possible price, but the profit-maximizing one.
- Monopolists can still face losses if demand is insufficient or costs are too high.
Economic Effects and Inefficiency
- Monopolies lead to allocative inefficiency (P > MC) and productive inefficiency (not producing at minimum ATC).
- Results in deadweight loss—society loses potential welfare.
- X-inefficiency may occur, where monopolies don't minimize costs due to lack of competition.
Price Discrimination
- Price discrimination means charging different prices to different consumer groups for the same product.
- Requires market segmentation and prevention of resale.
- Examples: airline tickets, movie pricing, and discounts for students or seniors.
Regulation and Policy Options
- Governments may regulate monopolies to control prices and improve efficiency.
- Options include public ownership, marginal-cost pricing, and average-cost pricing.
- Internet and technology enable new forms of personalized pricing.
Key Terms & Definitions
- Pure Monopoly — a market condition with only one seller and no close substitutes.
- Barriers to Entry — obstacles that prevent new firms from entering a market.
- Marginal Revenue (MR) — the additional revenue from selling one more unit.
- Deadweight Loss — lost economic efficiency when equilibrium is not achieved.
- X-Inefficiency — relaxation of cost minimization due to lack of competition.
- Price Discrimination — selling the same product at different prices to different buyers.
Action Items / Next Steps
- Review textbook chapter on monopoly structure and pricing.
- Complete assigned problem set on monopoly graphs and regulation.
- Prepare examples of price discrimination for class discussion.