PURE

MONOPOLY
MARKET MODEL
PURE MONOPOLY
• Characteristics
• Demand Curve
• Profit Maximization
• Loss Minimization
• Welfare Effects
PURE MONOPOLY
• A market in which one company has control
over the entire market for a product, usually
because of a barrier to entry such as a
technology only available to that company.
• A pure monopoly exists when a single firm is the
sole producer of a product for which there are
no close substitutes.
Characteristics:
• Single Seller
A pure or absolute, monopolist is a one-firm
industry. A single firm is the only producer of a
given product or the sole supplier of a service;
hence, the firm and the industry are synonymous.
Characteristics:
• No Close Substitutes
The monopolist’s product is unique in the
sense that there are no good, or close
substitutes. From the buyer’s point of view, this
means that there are no reasonable
alternatives. The buyer must buy the product
from the monopolist or do without.
Characteristics:
• Price Maker
The firm exercises considerable control over
price. And the reason is obvious: It is responsible for,
and therefore controls the total quantity supplied.
Given a down sloping demand curve for its product,
the monopolist can cause product price to change by
manipulating the quantity of the product supplied. If
it is advantageous, we can expect this power to be so
used.
Characteristics:
• Blocked Entry
A pure monopolist has no immediate
competitors, there must be a reason for this lack pf
competition. And there is: The existence of monopoly
depends upon the existence of barriers to entry . Be
they economic, technological, legal, or other
certain obstacles must exist to keep new
competitors from coming into the industry if
monopoly is to persist. Entry under conditions of
pure monopoly is blocked
Characteristics:
• Goodwill advertising
If pure monopolists do advertise, such
advertising is likely to be of a public relations,
goodwill character rather than highly competitive, as
is the advertising associated with say, cigarettes,
detergents, and beer. Because they have no immediate
rivals, monopolist in trying to induce more people to
buy their products, need not invoke that ours-is-
better-than–theirs type of advertising which
characterizes radio and television.
 DEMAND CURVE
• The monopolist’s demand curve is different.
Because the pure monopolist is the industry,
its demand curve is the industry demand curve.
The industry demand curve is not perfectly
elastic but negatively sloped. As a result, if the
monopolist wants to sell more of the
commodity or service, he must lower its
price. (MR < P – Marginal Revenue is less
than Price)
PROFIT MAXIMIZATION
• A profit-seeking monopolist will employ the
same rationale as profit-seeking firm in a
competitive industry. It will produce each
successive unit of output so long as it adds
more to total revenue than it does to total
costs. In technical language, the firm will
produce up to that output at which
marginal revenue equals marginal cost.
TO FIND TOTAL REVENUE:

PRICE x Quantity of output = total revenue

TO FIND TOTAL REVENUE:

PRICE x Quantity of output = total revenue

TO FIND MARGINAL REVENUE:

Maginal revenue = Total Revenue/

Quantity
LOSS
MINIMIZATION
WELFARE EFFECT
• Price, Output and Efficiency
- With the same costs, the pure
monopolist will find it profitable to restrict
output charge a higher price than would
seller in a purely competitive industry. This
restriction of output causes a misallocation of
resources, as is evidenced by the fact that the
price exceeds marginal cost in monopolized
market.
WELFARE EFFECT
• Income Transfer
- In general, monopoly transfers
income from consumers to the owners of
the monopoly. Because, on average,
consumers of monopolized products have
less income than the corporate owners,
monopoly increases income inequality.
WELFARE EFFECT
• Cost Complications
- The costs monopolists and
competitive producers may not be the
same. On the other hand, economies of
scale may make lower unit costs available
to monopolists but not to competitors.
 Also, pure monopoly
may be more likely than
pure competition to
reduce costs via
technological advance
because of the
monopolist’s ability to
realize economic profit,
which can be used to
finance research.
 On the other hand, X-inefficiency – the
failure to produce with the least costly
combination of inputs – is more common
among monopolists than among competitive
firms. Also, monopolists may take costly
expenditures to maintain monopoly
privileges that are conferred by government.
Finally, the blocked entry of rival firms
weakens the monopolist’s incentive to be
technologically progressive.
Presented By: Zandro Oraño
BSED 2