24 - 1 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Monopoly Examples Barriers to Entry The Natural Monopoly Case Monopoly Demand Monopoly Revenues.

24 - 1Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

Pure Monopoly

24C H A P T E R

24 - 2Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

Market Structure Continuum

PureCompetition

PureMonopoly

MonopolisticCompetition Oligopoly

FOUR MARKET MODELSPure Monopoly:• Single Seller• No Close Substitutes• Price Maker• Blocked Entry• Nonprice Competition

24 - 3Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

MONOPOLY EXAMPLES

Pure Monopoly Regulated Monopoly Near Monopolies Dual Objectives of the Study

• Monopoly as a Market Structure

• To Better Understand Other Market Structures

24 - 4Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

BARRIERS TO ENTRYEconomies of Scale

• The Natural Monopoly CaseLegal Barriers to Entry

• Patents• Licenses

Ownership or Control of Essential ResourcesPricing and Other Strategic Barriers to Entry

24 - 5Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

Ave

rag

e T

ota

l C

ost

Quantity

$20

15

10

0 50 100 200

ATCIf ATC declines over extended output, least-cost production is realized only if there is one producer - a natural monopoly

THE NATURAL MONOPOLY CASE

24 - 6Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

MONOPOLY DEMAND3 Basic Assumptions:

• Monopoly Status is Secure• No Governmental

Regulation• Firm Charges the Same

Price for all Units SoldMarket Demand Curve is the Firm’s Demand Curve

24 - 7Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

MONOPOLY DEMAND

1 2 3 4 5 6

P

Q

$142 132

D

As price decreases from$142 to $132...

Loss = $30

Gain = $132

but revenue will increase with the

additional unit sold

24 - 8Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

MONOPOLY REVENUES & COSTS

MarginalRevenue

0 1 23456789

10

90807060708090

110130150

Quantityof

Output

Price(AverageRevenue)

TotalRevenue

MarginalCost

Profit +or

loss -

$172 162 152142132122112102

928272

$ 0162304426528610672714736738720

$162142122102

82624222

2- 18

- $100- 28+ 34+ 86

+ 128+ 140+ 122

+ 74- 14

- 142- 310

AverageTotalCost

$190.00135.00113.33100.00

94.0091.6791.4393.7397.78

103.00

TotalCost

$100190270340400470550640750880

1030

]]]]]]]]]]

]]]]]]]]]]

Revenue Data Cost Data

Can you see profitmaximization?

24 - 9Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

MONOPOLY REVENUES & COSTS

MarginalRevenue

0 1 23456789

10

90807060708090

110130150

Quantityof

Output

Price(AverageRevenue)

TotalRevenue

MarginalCost

Profit +or

loss -

$172 162 152142132122112102

928272

$ 0162304426528610672714736738720

$162142122102

82624222

2- 18

- $100- 28+ 34+ 86

+ 128+ 140+ 122

+ 74- 14

- 142- 310

AverageTotalCost

$190.00135.00113.33100.00

94.0091.6791.4393.7397.78

103.00

TotalCost

$100190270340400470550640750880

1030

]]]]]]]]]]

]]]]]]]]]]

Revenue Data Cost Data

24 - 10Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

MONOPOLY REVENUES & COSTS

Q

Do

llar

sD

oll

ars

$200

150

200

50

$750

500

250

TR

MR D

InelasticElastic

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18Q

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

24 - 11Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

OUTPUT AND PRICE DETERMINATION

Cost DataMR = MC RuleNo Monopoly Supply CurveMonopoly Pricing

Misconceptions• Not Highest Price• Total, Not Unit, Profit• Possibility of Losses

Graphically…

24 - 12Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

Profit Maximization Under Monopoly

D

MC

ATC

MR

$94

$122Profit

MR = MC

ProfitPer Unit

OUTPUT AND PRICE DETERMINATION

Q

200

175

150

125

100

75

50

25

0 1 2 3 4 5 6 7 8 9 10

Pri

ce,

cost

s, a

nd

rev

enu

e

Remember the MR=MC Rule?

24 - 13Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

Loss Minimization Under Monopoly

D

MCATC

MR

APm

Loss

MR = MC

LossPer Unit

OUTPUT AND PRICE DETERMINATION

Q

200

175

150

125

100

75

50

25

0 1 2 3 4 5 6 7 8 9 10

Pri

ce,

cost

s, a

nd

rev

enu

e

AVC

Qm

V

Since Pm exceeds AVC,the firm will produce

24 - 14Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

Q

INEFFICIENCY OF PURE MONOPOLY

P

DMR

S = MC

Pc

Pm

QcQm

At MR=MCA monopolistwill sell less

units at ahigher price

than incompetition

An industry in pure competitionsells where supply and

demand are equal

24 - 15Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

ConditionsMonopoly PowerMarket SegregationNo Resale

ConsequencesMore ProfitMore Production

PRICE DISCRIMINATION

Graphically…

24 - 16Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

Q

DMR

MC

ATC

P

Q1

Pri

ce a

nd

Co

sts

Economic profits witha single MR=MC

price

PRICE DISCRIMINATION

24 - 17Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

Q

D

MC

ATC

P

Q1

Pri

ce a

nd

Co

sts

Economic profits withprice discrimination

PRICE DISCRIMINATION

Q2

MR=D

24 - 18Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

Natural MonopoliesRate RegulationSocially Optimum Price

P = MCFair-Return Price

P = ATCDilemma of Regulation

REGULATED MONOPOLY

Graphically…

24 - 19Copyright McGraw-Hill/Irwin, 2002

Four Market Models

Monopoly Examples

Barriers to Entry

The Natural Monopoly Case

Monopoly Demand

Monopoly Revenues & Costs

Output & Price Discrimination

Inefficiency of Pure Monopoly

Price Discrimination

Regulated Monopoly

Key Terms

PreviousSlide

NextSlide

EndShow

REGULATED MONOPOLY

Q

D

MR

MCATC

P

Pri

ce a

nd

Co

sts

MR = MC

Fair-Return Price

Socially-OptimumPrice

Qm Qf Qr

Dilemma of RegulationWhich Price?

Pm

Pf

Pr