doc.ejlopez@gmail.

com

PURE MONOPOLY

1.
2.
3.

4.

Pure monopoly is a type of market

characterized by;
a single seller or producer,
a unique product, with no close substitute,
the ability of the seller to ask any price it
wishes,
entry to the industry completely blocked by
legal, technological or economic barriers, and

5.

no need for non-price actions, except

public relations or goodwill advertising.

Examples of pure monopolies are not

common because monopolies are
either usually regulated or prohibited
altogether. Cases where
a company has substantial amount of
monopoly power, but cannot
be considered a pure monopoly, can
easily be found.

MONOPOLY UNIQUE PRODUCT

A monopoly exists when a firm is the only
producer of a given product. That product is
therefore unique to that firm.
The product is unique in the sense that no close
substitutes are presently easily available to
consumers.
- Such situation is rarely observed because
products providing a similar service can usually
be found in other industries orregions of the
world.

MONOPOLY POWER OVER PRICE

A monopoly has extensive power over the price it
may want to charge its customers.
The monopolist is sometimes referred to as a
price maker.
A monopolist does not charge the highest
possible price. Instead it charges the price for
which its profits are the largest.
A monopolist does not set a price independently
of the volume produced: quite the contrary, price
setting is implemented by restricting output.

MONOPOLY ENTRY BARRIERS

Monopoly exists when entry barriers are

present; these may be;

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

stemming from access to a key

resource (such as ore),
or;
resulting from unfair tactics or
unfair competition.

UNFAIR COMPETITION

Various strategies used by firms to eliminate

competitors by forcing them into bankruptcy

or preventing new firms from entering the
industry, are referred to as unfair competition.

They may include;

drastic under pricing of products, or
cornering of a resource market.
Most of these tactics have been declared illegal
in antitrust legislation.

MONOPOLY NON-PRICE ACTION

Since a monopolist is the only firm in

the industry, it appears that there is no

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

MONOPOLY DEMAND
The demand of a monopoly is

downward sloping because the

monopoly is the only firm in the
market, and demand for most
products is price sensitive.

MONOPOLY MARGINAL REVENUE

Marginal revenue is the additional revenue
received for the last unit sold.
- Since the monopolist can sell one more unit only
by lowering the price on all the units sold, the
marginal or additional revenue is not constant
but decreasing.
- The marginal revenue is less than price at any
quantity. If the demand curve is a straight line,
the slope of marginal revenue is twice the slope
of the demand curve.

MONOPOLY DEMAND ELASTICITY

The upper portion of the demand curve of a

monopoly is elastic, and marginal revenue is

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

MONOPOLY PROFIT

A monopoly finds its maximum profit by

producing at a level of output where

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

MONOPOLY OPTIMUM QUANTITY

The profit of a monopoly is determined by

first finding the optimum quantity with

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

Monopoly Profit Graph

 The monopoly profit is the difference

between total revenue and total cost.

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

MONOPOLY LOSS
A monopoly seeks to maximize profits, and

is capable of achieving such a goal by

controlling price and quantity.

However, should customer demand

decrease significantly, the monopolist will

be content with minimizing loss (in the
shortrun) and may even be forced to close
down.

Monopoly Loss Graph

MONOPOLY ECONOMIC EFFECT

A monopoly form of market is highly undesirable
for our society because of the sizable loss of
productive and allocative efficiency:
the price paid is higher than in perfect

competition and the quantity is smaller.

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