Possible Barriers to Entry “a market served by a single firm” 14 Monopoly

Possible Barriers to Entry (cont.)

Monopolist’s Marginal Revenue 999 1,000 1,001 Q $14.01 $14.00 $13.99 Price Marg Rev Revenue Demand for New Drug: Slope = $0.01/dose

,000 1,100 1,200 Q $16 $15 $14 $13 $12 Price Marg Rev Monopolist’s Marginal Revenue Doses of drug (100s) Price ($) Slope $0.01/dose MR = price + (quantity x slope) $16 + ( 800 x -$0.01 ) Market Demand Marginal Revenue

,000 1,100 1,200 Q Price $6,165 $6,300 $6,165 $5,740 $5,000 Profit $8 $6 $4 $2 $0 Marg Rev Marg Cost $5.30 $6.00 $6.70 $7.80 $9.00 Monopoly: price decreases with quantity Monopolist’s Output Decision

Output Cost or Price ($) Average cost Profit for Different Output Decisions Market Demand

Output Cost or Price ($) Average cost Profit for Different Output Decisions Market Demand

Output Cost or Price ($) Average cost Profit for Different Output Decisions Market Demand

Output Cost or Revenue ($) Marginal cost Monopolist’s Output Decision Marginal Revenue Market Demand Monopoly quantity & price

Output Price ($) Constant-Cost Industry Average Cost = Marginal Cost Market Demand Marginal Revenue Monopoly quantity & price Perfect competition quantity & price

Output Price ($) Perfect Competition: Constant-Cost Industry Average Cost = Marginal Cost Market Demand

Output Price ($) Monopoly: Constant-Cost Industry Average Cost = Marginal Cost Market Demand Deadweight loss from monopoly

Output Price ($) Monopoly with Price Discrimination Average Cost = Marginal Cost Market Demand Deadweight loss

Patents  government-protected monopolies  provide monopoly profits to a firm  encourages R&D and innovation Natural Monopolies  economies of scale for very large operations  inefficient for two firms to provide service  government often sets maximum price

Output Cost or Revenue ($) MRMR Demand MC ATC Regulating the Natural Monopoly ATC slopes downward: large economies of scale Monopolist would choose a price to maximize profit.

Output Cost or Revenue ($) MRMR Demand MC ATC Regulating the Natural Monopoly Regulators will set a lower price… … that satisfies the monopolist and maximizes total surplus