2. 24 - 1 Copyright 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 Previous Slide Next Slide End Show Pure Monopoly 24 C H A P T E R

3. 24 - 2 Copyright 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 Previous Slide Next Slide End Show Market Structure Continuum Pure Competition Pure Monopoly Monopolistic Competition Oligopoly FOUR MARKET MODELS Pure Monopoly: Single Seller No Close Substitutes Price Maker Blocked Entry Nonprice Competition

4. 24 - 3 Copyright 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 Previous Slide Next Slide End Show MONOPOLY EXAMPLES Pure Monopoly Regulated Monopoly Near Monopolies Dual Objectives of the Study Monopoly as a Market Structure To Better Understand Other Market Structures

5. 24 - 4 Copyright 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 Previous Slide Next Slide End Show BARRIERS TO ENTRY Economies of Scale The Natural Monopoly Case Legal Barriers to Entry Patents Licenses Ownership or Control of Essential Resources Pricing and Other Strategic Barriers to Entry

6. 24 - 5 Copyright 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 Previous Slide Next Slide End Show Average Total Cost Quantity $20 15 10 050100200 ATC If ATC declines over extended output, least-cost production is realized only if there is one producer - a natural monopoly THE NATURAL MONOPOLY CASE

7. 24 - 6 Copyright 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 Previous Slide Next Slide End Show MONOPOLY DEMAND 3 Basic Assumptions: Monopoly Status is Secure No Governmental Regulation Firm Charges the Same Price for all Units Sold Market Demand Curve is the Firms Demand Curve

8. 24 - 7 Copyright 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 Previous Slide Next Slide End Show 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

9. 24 - 8 Copyright 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 Previous Slide Next Slide End Show MONOPOLY REVENUES & COSTS Marginal Revenue 0 1 2 3 4 5 6 7 8 9 10 90 80 70 60 70 80 90 110 130 150 Quantity of Output Price (Average Revenue) Total Revenue Marginal Cost Profit + or loss - $172 162 152 142 132 122 112 102 92 82 72 $ 0 162 304 426 528 610 672 714 736 738 720 $162 142 122 102 82 62 42 22 2 - 18 - $100 - 28 + 34 + 86 + 128 + 140 + 122 + 74 - 14 - 142 - 310 Average Total Cost $190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.73 97.78 103.00 Total Cost $100 190 270 340 400 470 550 640 750 880 1030 ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Revenue DataCost Data Can you see profit maximization? MR > = MC

10. 24 - 9 Copyright 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 Previous Slide Next Slide End Show MONOPOLY REVENUES & COSTS Marginal Revenue 0 1 2 3 4 5 6 7 8 9 10 90 80 70 60 70 80 90 110 130 150 Quantity of Output Price (Average Revenue) Total Revenue Marginal Cost Profit + or loss - $172 162 152 142 132 122 112 102 92 82 72 $ 0 162 304 426 528 610 672 714 736 738 720 $162 142 122 102 82 62 42 22 2 - 18 - $100 - 28 + 34 + 86 + 128 + 140 + 122 + 74 - 14 - 142 - 310 Average Total Cost $190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.73 97.78 103.00 Total Cost $100 190 270 340 400 470 550 640 750 880 1030 ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Revenue DataCost Data

11. 24 - 10 Copyright 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 Previous Slide Next Slide End Show MONOPOLY REVENUES & COSTS Q Dollars $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 18 Q

12. 24 - 11 Copyright 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 Previous Slide Next Slide End Show OUTPUT AND PRICE DETERMINATION Cost Data MR = MC Rule No Monopoly Supply Curve Monopoly Pricing Misconceptions Not Highest Price Total, Not Unit, Profit Possibility of Losses Graphically…

13. 24 - 12 Copyright 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 Previous Slide Next Slide End Show Profit Maximization Under Monopoly D MC ATC MR $94 $122 Profit MR = MC Profit Per 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 Price, costs, and revenue Remember the MR=MC Rule?

14. 24 - 13 Copyright 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 Previous Slide Next Slide End Show Loss Minimization Under Monopoly D MC ATC MR A PmPm Loss MR = MC Loss Per 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 Price, costs, and revenue AVC QmQm V Since P m exceeds AVC, the firm will produce

15. 24 - 14 Copyright 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 Previous Slide Next Slide End Show Q INEFFICIENCY OF PURE MONOPOLY P D MR S = MC PcPc PmPm QcQc QmQm At MR=MC A monopolist will sell less units at a higher price than in competition An industry in pure competition sells where supply and demand are equal

16. 24 - 15 Copyright 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 Previous Slide Next Slide End Show Conditions Monopoly Power Market Segregation No Resale Consequences More Profit More Production PRICE DISCRIMINATION Graphically…

17. 24 - 16 Copyright 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 Previous Slide Next Slide End Show Q D MR MC ATC P Q1Q1 Price and Costs Economic profits with a single MR=MC price PRICE DISCRIMINATION

18. 24 - 17 Copyright 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 Previous Slide Next Slide End Show Q D MC ATC P Q1Q1 Price and Costs Economic profits with price discrimination PRICE DISCRIMINATION Q2Q2 MR=D

19. 24 - 18 Copyright 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 Previous Slide Next Slide End Show Natural Monopolies Rate Regulation Socially Optimum Price P = MC Fair-Return Price P = ATC Dilemma of Regulation REGULATED MONOPOLY Graphically…

20. 24 - 19 Copyright 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 Previous Slide Next Slide End Show REGULATED MONOPOLY Q D MR MC ATC P Price and Costs MR = MC Fair-Return Price Socially-Optimum Price QmQm QfQf QrQr Dilemma of Regulation Which Price? PmPm PfPf PrPr