2. 10- 1 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 Monopoly

3. 10- 2 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 Market Structure Continuum Pure Competition Pure Monopoly Monopolistic Competition Oligopoly FOUR MARKET MODELS Pure Monopoly:

4. 10- 3 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 MONOPOLY EXAMPLES Pure Monopoly Near Monopoly Natural Monopoly Regulated Monopoly

5. 10- 4 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 Average Total Cost Quantity $20 15 10 050100200 LRATC If LRATC declines over extended output, least-cost production is realized only if there is one producer - a natural monopoly. THE NATURAL MONOPOLY CASE

6. 10- 5 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 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

7. 10- 6 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 MONOPOLY 3 Basic Assumptions: Monopoly Status is Secure No Government Regulation Firm Charges the Same Price for all Units Sold

8. 10- 7 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 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 = - =

9. 10- 8 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 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!

10. 10- 9 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 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. 10- 10 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 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

12. 10- 11 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 MONOPOLY REVENUES & COSTS Dollars $200 150 100 50 Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

13. 10- 12 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 MONOPOLY REVENUES & COSTS Dollars $200 150 100 50 MR Elastic DARP Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

14. 10- 13 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 MONOPOLY REVENUES & COSTS Dollars $200 150 100 50 MR DARP InelasticElastic 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q MR bisects DARP When MR = 0 Total Revenue is Maximized When MR is positive D is elastic When MR is negative D is inelastic

15. 10- 14 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 OUTPUT AND PRICE DETERMINATION MR = MC Rule No Monopoly Supply Curve Market Demand is the Monopoly Demand Monopoly Misconceptions Not Highest Price Possibility of Losses Graphically…

16. 10- 15 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 Profit Maximization Under Monopoly DARP 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

17. 10- 16 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 Profit Maximization Under Monopoly DARP 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?

18. 10- 17 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 Loss Minimization Under Monopoly DARP 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

19. 10- 18 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 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?

20. 10- 19 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 Q INEFFICIENCY OF PURE MONOPOLY P DARP 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

21. 10- 20 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 Q INEFFICIENCY OF PURE MONOPOLY P DARP 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 a welfare transfer from buyers to the seller!

22. 10- 21 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 COST COMPLICATIONS Economies of Scale Simultaneous consumption Network effects Diseconomies of Scale X-Inefficiency Rent-Seeking Behavior Technological Advance

23. 10- 22 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 Conditions Monopoly Power Market Segregation No Resale Consequences More Profit More Production PRICE DISCRIMINATION Graphically…

24. 10- 23 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 Q DARP MR MC ATC P Q1Q1 Price and Costs Economic profits with a single MR=MC price PRICE DISCRIMINATION

25. 10- 24 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 Q DARP 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

26. 10- 25 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 Q DARP MC ATC P Q1Q1 Price and Costs Economic profits with price discrimination PRICE DISCRIMINATION Q2Q2 MR=D

27. 10- 26 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

28. 10- 27 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 Monopoly Assessment & Policy Options Antitrust Action Sherman Act Clayton Act Ignore it, if it is short lived Regulate Natural Monopolies

29. 10- 28 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 Natural Monopolies Socially Optimum Price P = MC Fair-Return Price P = ATC REGULATED MONOPOLY Graphically…

30. 10- 29 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 REGULATED MONOPOLY Q DARP MR MC ATC P Price and Costs Monopoly Price MR = MC QmQm PmPm

31. 10- 30 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 REGULATED MONOPOLY Q DARP MR MC ATC P Price and Costs Fair-Return Price Normal Profit Only QfQf PfPf

32. 10- 31 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 REGULATED MONOPOLY Q DARP MR MC ATC P Price and Costs Socially-Optimum Price P = MC QrQr PrPr

33. 10- 32 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 REGULATED MONOPOLY Q DARP 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