1. Copyright 2008 The McGraw-Hill Companies 22-1 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show 22 Pure Monopoly

2. Copyright 2008 The McGraw-Hill Companies 22-2 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show Chapter Objectives Characteristics of Pure Monopoly How Pure Monopoly Sets Profit Maximizing Output and Price The Economic Effects of Monopoly Why A Monopolist May Wish to Charge Different Prices in Different Markets

3. Copyright 2008 The McGraw-Hill Companies 22-3 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show Characteristics Single Seller No Close Substitutes Price Maker Blocked Entry Nonprice Competition Examples –Regulated Monopolies –Near-Monopolies –Western Union-Frisbee- De Beers Dual Objectives of Study O 22.1

4. Copyright 2008 The McGraw-Hill Companies 22-4 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show Barriers to Entry Economies of Scale Legal Barriers to Entry –Patents –Licenses Ownership or Control of Essential Resources Pricing and Other Strategic Barriers to Entry O 22.2

5. Copyright 2008 The McGraw-Hill Companies 22-5 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show Monopoly Demand Monopoly Status is Secure No Governmental Regulation Firm is a Single-Price Monopolist (No Price Discrimination)

6. Copyright 2008 The McGraw-Hill Companies 22-6 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show 0 123456 $142 132 122 112 102 92 82 Price and Marginal Revenue Marginal Revenue is Less Than Price D A Monopolist is Selling 3 Units at $142 To Sell More (4), Price Must Be Lowered to $132 All Customers Must Pay the Same Price TR Increases $132 Minus $30 (3x$10) Gain = $132 Loss = $30

7. Copyright 2008 The McGraw-Hill Companies 22-7 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show 0 123456 $142 132 122 112 102 92 82 Price and Marginal Revenue Marginal Revenue is Less Than Price D A Monopolist is Selling 3 Units at $142 To Sell More (4), Price Must Be Lowered to $132 All Customers Must Pay the Same Price TR Increases $132 Minus $30 (3x$10) $102 Becomes a Point on the MR Curve Try Other Prices to Determine Other MR Points Gain = $132 Loss = $30 The Constructed Marginal Revenue Curve Must Always Be Less Than the Price MR

8. Copyright 2008 The McGraw-Hill Companies 22-8 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show Monopoly Revenue and Costs Revenue and Cost Data of a Pure Monopolist (1) Quantity Of Output (2) Price (Average Revenue) (3) Total Revenue (1) X (2) (4) Marginal Revenue (5) Average Total Cost (6) Total Cost (1) X (5) (7) Marginal Cost (8) Profit (+) or Loss (-) 0 1 2 3 4 5 6 7 8 9 10 $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 $190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.75 97.78 103.00 $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 Revenue Data Cost Data ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Can you See Profit Maximization?

9. Copyright 2008 The McGraw-Hill Companies 22-9 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show $200 150 100 50 0 $750 500 250 0 24681012141618 24681012141618 Price Total Revenue Monopoly Revenue and Costs Demand, Marginal Revenue, and Total Revenue for a Pure Monopolist ElasticInelastic Demand and Marginal Revenue Curves Total-Revenue Curve D MR TR

10. Copyright 2008 The McGraw-Hill Companies 22-10 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show Monopoly Revenue and Costs Monopolist is a Price Maker Sets Price in the Elastic Region Output and Price Determination –Cost Data –MR = MC Rule No Supply Curve G 22.1 W 22.1

11. Copyright 2008 The McGraw-Hill Companies 22-11 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show Profit Maximization 0 $200 175 150 125 25 100 75 50 Price, Costs, and Revenue 12345678910 Quantity By A Pure Monopolist D MR ATC MC MR=MC P m =$122 A=$94 Economic Profit

12. Copyright 2008 The McGraw-Hill Companies 22-12 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show Misconceptions Not the Highest Price Total, Not Unit, Profit Possibility of Losses Concerning Monopoly Pricing

13. Copyright 2008 The McGraw-Hill Companies 22-13 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show Loss Minimization 0 Price, Costs, and Revenue Quantity By A Pure Monopolist D MR ATC MC MR=MC Loss AVC PmPm QmQm V A

14. Copyright 2008 The McGraw-Hill Companies 22-14 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show Economic Effects of Monopoly Price, Output, and Efficiency Purely Competitive Market Pure Monopoly D D S=MC MC P=MC= Minimum ATC MR PcPc QcQc PcPc PmPm QcQc QmQm Pure Competition is Efficient Monopoly Price is Greater Than MC And Is Therefore Inefficient a b c

15. Copyright 2008 The McGraw-Hill Companies 22-15 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show Economic Effects of Monopoly Price, Output, and Efficiency Income Transfer Cost Complications Economies of Scale –Simultaneous Consumption –Network Effects

16. Copyright 2008 The McGraw-Hill Companies 22-16 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show X-Inefficiency Rent-Seeking Expenditures –Rent-Seeking Behavior Technological Advance Assessment and Policy Options X X Average Total Costs ATC X ATC 1 ATC X ATC 2 Quantity Q1Q1 Q2Q2 Average Total Cost Economic Effects of Monopoly O 22.3

17. Copyright 2008 The McGraw-Hill Companies 22-17 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show Representative Highly Competitive Foreign Multinational Corporations GLOBAL PERSPECTIVE Economic Effects of Monopoly Company (Country) Main Products Bayer (Germany) BP Amoco (United Kingdom Michelin (France) NEC (Japan) Nestlé (Switzerland) Nokia (Finland) Royal Dutch/Shell (Netherlands) Royal Philips (Netherlands) Sony (Japan) Toyota (Japan) Unilever (Netherlands) Chemicals Gasoline Tires Computers Food Products Wireless Phones Gasoline Electronics Automobiles Food Products Source: Fortune.com

18. Copyright 2008 The McGraw-Hill Companies 22-18 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show Price Discrimination Three Forms –Charging Each Customer the Maximum They Are Willing to Pay –Charging Each Customer One Price For The First Set of Units Purchased and a Lower Price for Subsequent Units –Charging Some Customers One Price and a Different Price for Other Customers O 22.4

19. Copyright 2008 The McGraw-Hill Companies 22-19 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show Price Discrimination Conditions –Monopoly Power –Market Segregation –No Resale Examples of Price Discrimination –Airfares –Electric Utilities –Theaters & Golf Courses W 22.1

20. Copyright 2008 The McGraw-Hill Companies 22-20 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show Regulated Monopoly Natural Monopolies Rate Regulation Socially Optimum Price P = MC Fair Return Price P = ATC

21. Copyright 2008 The McGraw-Hill Companies 22-21 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show 0 Price and Costs (Dollars) Quantity Regulated Monopoly Dilemma of Regulation Monopoly Price Fair-Return Price Socially Optimal Price PrPr D r f b a PfPf PmPm QmQm QfQf QrQr MR MC ATC

22. Copyright 2008 The McGraw-Hill Companies 22-22 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show De Beers Diamonds 66 Year Policy of Monopolizing the Diamond Trade Mid-2000 Abandoned Monopoly Efforts Decline in Number of Select Dealers and Cutters Classic Monopoly Behavior –Pricing –Single-Channel Marketing Last Word Are Monopolies Forever?

23. Copyright 2008 The McGraw-Hill Companies 22-23 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show De Beers Diamonds End of an Era New Diamond Discoveries- Angola, Canada Australian Producer Withdrew Bad Press and Public Perception Over Civil Strife Financing Role Becoming Cartel of Specialized High-End Diamonds Monopoly Didnt Last Forever! Last Word Are Monopolies Forever?

24. Copyright 2008 The McGraw-Hill Companies 22-24 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show Key Terms pure monopoly barriers to entry simultaneous consumption network effects X-inefficiency rent-seeking behavior price discrimination socially optimal price fair-return price

25. Copyright 2008 The McGraw-Hill Companies 22-25 Characteristics Barriers to Entry Monopoly Demand Price and Marginal Revenue Marginal Revenue and Costs Profit Maximization Misconceptions Loss Minimization Economic Effects of Monopoly Price Discrimination Regulated Monopoly Last Word Key Terms End Show Next Chapter Preview… Monopolistic Competition and Oligopoly