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Four Market Models Monopoly Examples Barriers to Entry The Natural Monopoly Case Monopoly Demand 24 C HAPTE R Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 24 - 1 Next Slide Copyright McGraw-Hill/Irwin, 2002 Pure Monopoly 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 Pure Competition Key Terms Previous Slide End Show 24 - 2 FOUR MARKET MODELS Pure Monopoly: • Single Seller • No Close Substitutes • Price Maker • Blocked Entry • Nonprice Competition Next Slide Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum 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 End Show 24 - 3 Next Slide MONOPOLY EXAMPLES Pure Monopoly Regulated Monopoly Near Monopolies Dual Objectives of the Study • Monopoly as a Market Structure • To Better Understand Other Market Structures 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 End Show 24 - 4 Next Slide 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 Copyright McGraw-Hill/Irwin, 2002 THE NATURAL MONOPOLY CASE Four Market Models Monopoly Examples The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 24 - 5 Next Slide Average Total Cost Barriers to Entry $20 15 ATC 10 If ATC declines over extended output, least-cost production is realized only if there is one producer - a natural monopoly 0 50 Copyright McGraw-Hill/Irwin, 2002 100 Quantity 200 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 End Show 24 - 6 Next Slide 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 Firm’s Demand Curve Copyright McGraw-Hill/Irwin, 2002 MONOPOLY DEMAND P Four Market Models Monopoly Examples Barriers to Entry The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination As price decreases from $142 to $132... but revenue will $142 Loss = $30 increase with the 132 additional unit sold Inefficiency of Pure Monopoly Price Discrimination D Regulated Monopoly Gain = $132 Key Terms Previous Slide End Show 24 - 7 Next Slide 1 2 Copyright McGraw-Hill/Irwin, 2002 3 4 5 6 Q MONOPOLY REVENUES & COSTS Revenue Data Four Market Models Monopoly Examples Barriers to Entry The Natural Monopoly Case Monopoly Demand e profit tion? Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 24 - 8 Next Slide Quantity Price of (Average Total Marginal Output Revenue) Revenue Revenue 0 1 2 3 4 5 6 7 8 9 10 $172 $ 0 ] 162 162 ] 152 304 ] 142 426 ] 132 528 ] 122 610 ] 112 672 ] 102 714 ] 92 736 ] 82 738 ] 72 720 Copyright McGraw-Hill/Irwin, 2002 Cost Data Average Total Cost $162 $190.00 142 135.00 122 113.33 102 100.00 82 94.00 62 91.67 42 91.43 22 93.73 2 97.78 - 18 103.00 Profit + Total Marginal or loss Cost Cost $100 ] 190 ] 270 ] 340 ] 400 ] 470 ] 550 ] 640 ] 750 ] 880 ] 1030 90 80 70 60 70 80 90 110 130 150 - $100 - 28 + 34 + 86 + 128 + 140 + 122 + 74 - 14 - 142 - 310 MONOPOLY REVENUES & COSTS Revenue Data 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 End Show 24 - 9 Next Slide Quantity Price of (Average Total Marginal Output Revenue) Revenue Revenue 0 1 2 3 4 5 6 7 8 9 10 $172 $ 0 ] 162 162 ] 152 304 ] 142 426 ] 132 528 ] 122 610 ] 112 672 ] 102 714 ] 92 736 ] 82 738 ] 72 720 Copyright McGraw-Hill/Irwin, 2002 Cost Data Average Total Cost $162 $190.00 142 135.00 122 113.33 102 100.00 82 94.00 62 91.67 42 91.43 22 93.73 2 97.78 - 18 103.00 Profit + Total Marginal or loss Cost Cost $100 ] 190 ] 270 ] 340 ] 400 ] 470 ] 550 ] 640 ] 750 ] 880 ] 1030 90 80 70 60 70 80 90 110 130 150 - $100 - 28 + 34 + 86 + 128 + 140 + 122 + 74 - 14 - 142 - 310 MONOPOLY REVENUES & COSTS Elastic Inelastic $200 Monopoly Examples Barriers to Entry The Natural Monopoly Case Monopoly Demand Dollars Four Market Models Monopoly Revenues & Costs 150 200 MR 50 Output & Price Discrimination D 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q Inefficiency of Pure Monopoly $750 Regulated Monopoly Key Terms Previous Slide End Show 24 - 10 Next Slide Dollars Price Discrimination 500 TR 250 Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Copyright McGraw-Hill/Irwin, 2002 OUTPUT AND PRICE DETERMINATION 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 End Show 24 - 11 Next Slide Cost Data MR = MC Rule No Monopoly Supply Curve Monopoly Pricing Misconceptions • Not Highest Price • Total, Not Unit, Profit • Possibility of Losses Graphically… Copyright McGraw-Hill/Irwin, 2002 OUTPUT AND PRICE DETERMINATION Profit Maximization Under Monopoly Four Market Models Monopoly Examples Remember the MR=MC Rule? 200 Barriers to Entry Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 24 - 12 Next Slide Profit Per Unit 175 Price, costs, and revenue The Natural Monopoly Case 150 $122 125 $94 100 MC Profit ATC D 75 50 MR = MC 25 0 1 Copyright McGraw-Hill/Irwin, 2002 2 3 4 MR 5 6 7 8 9 10 Q OUTPUT AND PRICE DETERMINATION Loss Minimization Under Monopoly Four Market Models 200 Monopoly Examples Loss Per Unit Barriers to Entry Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 24 - 13 Next Slide 175 Price, costs, and revenue The Natural Monopoly Case MC ATC AVC 150 A 125 Loss Pm 100 V D 75 50 MR = MC 25 0 1 Copyright McGraw-Hill/Irwin, 2002 2 3 4 MR 5 Qm 6 7 8 9 10 Q S INEFFICIENCY OF PURE MONOPOLY P An industry in pure competition S = MC sells where supply and Four Market Models demand are equal Monopoly Examples Barriers to Entry At MR=MC A monopolist will sell less units at a higher price than in competition The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Pm Output & Price Discrimination Pc Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms D Previous Slide End Show 24 - 14 Next Slide MR Qm Copyright McGraw-Hill/Irwin, 2002 Qc Q 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 End Show 24 - 15 Next Slide PRICE DISCRIMINATION Conditions Monopoly Power Market Segregation No Resale Consequences More Profit More Production Graphically… Copyright McGraw-Hill/Irwin, 2002 PRICE DISCRIMINATION Four Market Models P Monopoly Examples The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 24 - 16 Price and Costs Barriers to Entry Economic profits with a single MR=MC price ATC Next Slide MR Q1 Copyright McGraw-Hill/Irwin, 2002 MC D Q PRICE DISCRIMINATION Four Market Models P Monopoly Examples The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 24 - 17 Price and Costs Barriers to Entry Economic profits with price discrimination MC ATC MR=D D Next Slide Q1 Copyright McGraw-Hill/Irwin, 2002 Q2 Q 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 End Show 24 - 18 REGULATED MONOPOLY Natural Monopolies Rate Regulation Socially Optimum Price P = MC Fair-Return Price P = ATC Next Slide Dilemma of Regulation Graphically… Copyright McGraw-Hill/Irwin, 2002 REGULATED MONOPOLY P Four Market Models Monopoly Examples The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Fair-Return Price Price and Costs Barriers to Entry Dilemma of Regulation MR = MC Which Price? Pm Socially-Optimum Price ATC MC Pf Pr D Previous Slide End Show 24 - 19 Next Slide MR Qm Copyright McGraw-Hill/Irwin, 2002 Qf Qr Q
