A WRITTEN REPORT IN PURE MONOPOLY

Submitted to:
Mrs. Eponine Contemprato

Submitted by:
Noche, Carmella Panaligan, Joenel Parate, Lorie Beth

AC202

TABLE OF CONTENTS:

I.

Objectives

II.

Introduction

III.

Discussion
a. b. c. d.

Pure Monopoly Barriers to entry Monopoly Demand Monopoly Marginal Revenue

e. Monopoly Profit & Loss f. Price Discrimination

IV. References

OBJECTIVES:

1. To define what a pure monopoly is. 2. To show how a monopoly determines price and quantity for its maximum profit. 3. To determine how the demand of the market affects the demand in a pure monopoly. 4. To define what price discrimination is and how it is related with pure monopoly.

INTRODUCTION:

Market structure, also known as market form, describes the state of a market with respect to the degree or intensity of competition among buyers on one side and among sellers/ producers on the other side. Market micro-structure is also distinguished by the process of price discovery, the differentiation / homogeneity of products, the process of bidding, the trade/ exchange settlement mechanism, the symmetry or asymmetry of the dispersal of market relevant information among the individual parties to each transaction of trade/ exchange. This is the subject of market morphology. Based on the various characteristic status/ values, different types of markets are given different names like perfect competition, monopoly. Oligopoly, duopoly, monopolistic competition, oligopolistic competition, monopsony, oligopsony etc.

WHAT IS A PURE MONOPOLY?

Pure Monopoly is a market structure in which one company has a control over the entire market of a product, usually because of a barrier to entry such as a technology only available to that company.

CHARACTERISTICS OF PURE MONOPOLY:

a. single seller or producer There is only one firm that produces a particular product, theres no competitor at all. The firm and the industry are synonymous.

b. the product is unique, with no close substitute The 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.

c. the seller has the ability to ask any price it wishes

 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.

d. barriers to entry These are the factors that prohibit potential competitors from entering an industry

e. non-price action Since a monopoly 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 non price actions are used as a form of public relations and for the purpose of avoiding customer antagonism.

BARRIERS TO ENTRY:
Economies of scale it will be difficult for new, small firms to compete with the monopolys low ATC Legal barriers to entry these are legal protection in forms of patent and licensing 1. Patent exclusive right of an inventor to use, or to allow another to use, his or her invention 2. Licensing government using its authority to limit entry into industry Ownership or control of essential resources a firm that owns an essential resource can prohibit the entry of rival firms.

(e.g. Private property serves as an obstacle for potential rivals.) Strategic pricing monopolys power to adjust price and run at short term losses in order to outcompete new competitors

MONOPOLY DEMAND
Because the pure monopoly is the only firm in the market, its demand curve is the market demand curve. And because market demand is not perfectly elastic, the monopolys demand curve is downward sloping. (I.e. Qd increases as P decreases)

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.

The marginal revenue received by a monopoly is the change in total revenue divided by the change in quantity, often expressed by this simple equation: marginal revenue change in total revenue = change quantity

Quantity 0 1 2 3 4 5 6 7 8 9 10 11 12

Price 10.50 10.00 9.50 9.00 8.50 8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50

Total Revenue 0 10 19 27 34 40 45 49 52 54 55 55 54

Marginal Revenue 10 9 8 7 6 5 4 3 2 1 0 -1

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 the last unit).

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 short run) and may even be forced to close down

Output Price 0 1 14 12

Total Marginal Total Average Marginal Monopoly revenue revenue cost total cost cost profits 0 12 12 2 6 6 4 2 6

Output Price

Total Marginal Total Average Marginal Monopoly revenue revenue cost total cost cost profits

2 3 4 5

10 8 6 4

20 24 24 20

8 4 0 4

8 12 20 35

4 4 5 7

2 4 8 15

12 12 4 15

In order to determine the profit maximizing level of output, the monopolist will need to supplement its information about market demand and prices with data on its costs of production for different levels of output. As an example of the costs that a

monopolist might face, consider the data in Table 1 . The first two columns of Table1 represent the market demand schedule that the monopolist faces. As the price falls, the market's demand for output increases. The third column reports the total revenue that the monopolist receives from each different level of output. The fourth column reports the monopolist's marginal revenue that is just the change in total revenue per 1 unit change of output. The fifth column reports the monopolist's total cost of providing 0 to 5 units of output. The sixth and seventh columns report the monopolist's average total costs and marginal costs per unit of output. The eighth column reports the monopolist's profits, which is the difference between total revenue and total cost at each level of output. The monopolist will choose to produce 3 units of output because the marginal revenue that it receives from the third unit of output, 4, is equal to the marginal cost of producing the third unit of output, 4. The monopolist will earn 12 in profits from producing 3 units of output, the maximum possible.

PRICE DISCRIMINATION
A monopolist may be able to engage in a policy of price discrimination. This occurs when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with the costs of production. It is important to stress that charging different prices for similar goods is not price discrimination. For example, price discrimination does not does not occur when a rail company charges a higher price for a first class seat. This is because the price premium over a second-class seat can be explained by differences in the cost of providing the service. CONDITIONS REQUIRED FOR PRICE DISCRIMINATION TO WORK There are basically three main conditions required for price discrimination to take place. Monopoly power Firms must have some price setting power - so we don't see price discrimination in perfectly competitive markets. Elasticity of demand There must be a different price elasticity of demand for the product from each group of consumers. This allows the firm to extract consumer surplus by varying the price leading to additional revenue and profit. Separation of the market

The firm must be able to split the market into different sub-groups of consumers and then prevent the good or service being resold between consumers. (For example a rail operator must make it impossible for someone paying a "cheap fare" to resell to someone expected to pay a higher fare. This is easier in the provision of services rather than goods. The costs of separating the market and selling to different sub-groups (or market segments) must not be prohibitive. Examples of price discrimination There are numerous good examples of discriminatory pricing policies. We must be careful to distinguish between discrimination (based on consumer's willingness to pay) and product differentiation - where price differences might also reflect a different quality or standard of service. Some examples worth considering include:

Cinemas and theatres cutting prices to attract younger and older audiences Student discounts for rail travel, restaurant meals and holidays Car rental firms cutting prices at weekends Hotels offering cheap weekend breaks and winter discounts

The aims of price discrimination It must be remembered that the main aim of price discrimination is to increase the total revenueand/or profits of the supplier! It helps them to off-load excess capacity and can also be used as a technique to take market share away from rival firms. Some consumers do benefit from this type of pricing - they are "priced into the market" when with one price they might not have been able to afford a product. For most consumers however the price they pay reflects pretty closely what they are willing to pay. In this respect, price discrimination seeks to extract consumer surplus and turn it into producer surplus (or monopoly profit).

REFERENCES:
http://welkerswikinomics.wetpaint.com/page/Chapter+22+-+%22Pure+Monopoly %22 http://tutor2u.net/economics/content/topics/monopoly/price_discrimination.htm http://www.cliffsnotes.com/study_guide/Profit-Maximization.topicArticleId9789,articleId-9769.html