2. 11 - 1 Copyright McGraw-Hill/Irwin, 2005 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 11 C H A P T E R

3. 11 - 2 Copyright McGraw-Hill/Irwin, 2005 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. 11 - 3 Copyright McGraw-Hill/Irwin, 2005 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. 11 - 4 Copyright McGraw-Hill/Irwin, 2005 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 Minimum Efficient Scale Legal Barriers to Entry Patents Licenses Ownership or Control of Essential Resources Pricing and Other Strategic Barriers to Entry

6. 11 - 5 Copyright McGraw-Hill/Irwin, 2005 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. 11 - 6 Copyright McGraw-Hill/Irwin, 2005 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 Firm’s Demand Curve

8. 11 - 7 Copyright McGraw-Hill/Irwin, 2005 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. 11 - 8 Copyright McGraw-Hill/Irwin, 2005 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. Marginal Revenue $142 - $30 = $102 will necessarily be less than price $132.

10. 11 - 9 Copyright McGraw-Hill/Irwin, 2005 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 Quantity of Output Price (Average Revenue) Total Revenue Marginal Cost Profit + or loss - $172$ 0 - $100 Average Total Cost Total Cost $100 Revenue DataCost Data x = - =

11. 11 - 10 Copyright McGraw-Hill/Irwin, 2005 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 0 $172$ 0 - $100$100 MONOPOLY REVENUES & COSTS Marginal Revenue 0 1 90 Quantity of Output Price (Average Revenue) Total Revenue Marginal Cost Profit + or loss - $172 162 $ 0 162 $162 - $100 - 28 Average Total Cost $190.00 Total Cost $100 190 ]] Revenue DataCost Data x = - = MR = $162 – 0 = $162 MC = $190 – 100 = $90 MR > MC Loss Improvement from -$100 to -$28 Check next unit of output!

12. 11 - 11 Copyright McGraw-Hill/Irwin, 2005 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

13. 11 - 12 Copyright McGraw-Hill/Irwin, 2005 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

14. 11 - 13 Copyright McGraw-Hill/Irwin, 2005 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

15. 11 - 14 Copyright McGraw-Hill/Irwin, 2005 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 Dollars $200 150 200 50 $750 500 250 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q Q

16. 11 - 15 Copyright McGraw-Hill/Irwin, 2005 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 Dollars $200 150 200 50 $750 500 250 MR Elastic 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 D Q TR Q

17. 11 - 16 Copyright McGraw-Hill/Irwin, 2005 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

18. 11 - 17 Copyright McGraw-Hill/Irwin, 2005 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…

19. 11 - 18 Copyright McGraw-Hill/Irwin, 2005 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?

20. 11 - 19 Copyright McGraw-Hill/Irwin, 2005 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 What About Loss Minimization?

21. 11 - 20 Copyright McGraw-Hill/Irwin, 2005 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

22. 11 - 21 Copyright McGraw-Hill/Irwin, 2005 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 What are the Economic Effects of Monopoly?

23. 11 - 22 Copyright McGraw-Hill/Irwin, 2005 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.

24. 11 - 23 Copyright McGraw-Hill/Irwin, 2005 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 Monopoly pricing effectively creates an income transfer from buyers to the seller!

25. 11 - 24 Copyright McGraw-Hill/Irwin, 2005 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 COST COMPLICATIONS Average total costs Quantity Average Total Costs X X’ Q1Q1 Q2Q2 ATC x ATC 1 ATC 2 ATC x’ Economies of Scale Simultaneous Consumption Network Effects X-Inefficiency Inefficient internal operation leads to higher-than- necessary costs.

26. 11 - 25 Copyright McGraw-Hill/Irwin, 2005 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 COST COMPLICATIONS Economies of Scale Simultaneous Consumption Network Effects X-Inefficiency Rent-Seeking Expenditures Rent-Seeking Behavior Technological Advance Assessment and Policy Options Antitrust Action Regulate Natural Monopoly Ignore it, if it is Short-Lived

27. 11 - 26 Copyright McGraw-Hill/Irwin, 2005 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…

28. 11 - 27 Copyright McGraw-Hill/Irwin, 2005 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

29. 11 - 28 Copyright McGraw-Hill/Irwin, 2005 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 PRICE DISCRIMINATION Q2Q2 A perfectly discriminating monopolist has MR=D, producing more product and more profit! MR=D

30. 11 - 29 Copyright McGraw-Hill/Irwin, 2005 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

31. 11 - 30 Copyright McGraw-Hill/Irwin, 2005 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…

32. 11 - 31 Copyright McGraw-Hill/Irwin, 2005 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 Monopoly Price MR = MC QmQm PmPm

33. 11 - 32 Copyright McGraw-Hill/Irwin, 2005 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 Fair-Return Price Normal Profit Only QfQf PfPf

34. 11 - 33 Copyright McGraw-Hill/Irwin, 2005 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 Socially-Optimum Price P = MC QrQr PrPr

35. 11 - 34 Copyright McGraw-Hill/Irwin, 2005 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

36. pure monopoly barriers to entry simultaneous consumption network effects X-inefficiency rent-seeking behavior price discrimination socially optimal price fair-return price ENDBACK Copyright McGraw-Hill/Irwin, 2005

37. 11 - 36 Copyright McGraw-Hill/Irwin, 2005 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 Monopolistic Competition & Oligopoly Chapter 12 Next