24 - 1 copyright mcgraw-hill/irwin, 2002 four market models monopoly examples barriers to entry the...
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24 - 1Copyright 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
PreviousSlide
NextSlide
EndShow
Pure Monopoly
24C H A P T E R
24 - 2Copyright 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
PreviousSlide
NextSlide
EndShow
Market Structure Continuum
PureCompetition
PureMonopoly
MonopolisticCompetition Oligopoly
FOUR MARKET MODELSPure Monopoly:• Single Seller• No Close Substitutes• Price Maker• Blocked Entry• Nonprice Competition
24 - 3Copyright 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
PreviousSlide
NextSlide
EndShow
MONOPOLY EXAMPLES
Pure Monopoly Regulated Monopoly Near Monopolies Dual Objectives of the Study
• Monopoly as a Market Structure
• To Better Understand Other Market Structures
24 - 4Copyright 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
PreviousSlide
NextSlide
EndShow
BARRIERS TO ENTRYEconomies of Scale
• The Natural Monopoly CaseLegal Barriers to Entry
• Patents• Licenses
Ownership or Control of Essential ResourcesPricing and Other Strategic Barriers to Entry
24 - 5Copyright 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
PreviousSlide
NextSlide
EndShow
Ave
rag
e T
ota
l C
ost
Quantity
$20
15
10
0 50 100 200
ATCIf ATC declines over extended output, least-cost production is realized only if there is one producer - a natural monopoly
THE NATURAL MONOPOLY CASE
24 - 6Copyright 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
PreviousSlide
NextSlide
EndShow
MONOPOLY DEMAND3 Basic Assumptions:
• Monopoly Status is Secure• No Governmental
Regulation• Firm Charges the Same
Price for all Units SoldMarket Demand Curve is the Firm’s Demand Curve
24 - 7Copyright 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
PreviousSlide
NextSlide
EndShow
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
24 - 8Copyright 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
PreviousSlide
NextSlide
EndShow
MONOPOLY REVENUES & COSTS
MarginalRevenue
0 1 23456789
10
90807060708090
110130150
Quantityof
Output
Price(AverageRevenue)
TotalRevenue
MarginalCost
Profit +or
loss -
$172 162 152142132122112102
928272
$ 0162304426528610672714736738720
$162142122102
82624222
2- 18
- $100- 28+ 34+ 86
+ 128+ 140+ 122
+ 74- 14
- 142- 310
AverageTotalCost
$190.00135.00113.33100.00
94.0091.6791.4393.7397.78
103.00
TotalCost
$100190270340400470550640750880
1030
]]]]]]]]]]
]]]]]]]]]]
Revenue Data Cost Data
Can you see profitmaximization?
24 - 9Copyright 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
PreviousSlide
NextSlide
EndShow
MONOPOLY REVENUES & COSTS
MarginalRevenue
0 1 23456789
10
90807060708090
110130150
Quantityof
Output
Price(AverageRevenue)
TotalRevenue
MarginalCost
Profit +or
loss -
$172 162 152142132122112102
928272
$ 0162304426528610672714736738720
$162142122102
82624222
2- 18
- $100- 28+ 34+ 86
+ 128+ 140+ 122
+ 74- 14
- 142- 310
AverageTotalCost
$190.00135.00113.33100.00
94.0091.6791.4393.7397.78
103.00
TotalCost
$100190270340400470550640750880
1030
]]]]]]]]]]
]]]]]]]]]]
Revenue Data Cost Data
24 - 10Copyright 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
PreviousSlide
NextSlide
EndShow
MONOPOLY REVENUES & COSTS
Q
Do
llar
sD
oll
ars
$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 18Q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
24 - 11Copyright 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
PreviousSlide
NextSlide
EndShow
OUTPUT AND PRICE DETERMINATION
Cost DataMR = MC RuleNo Monopoly Supply CurveMonopoly Pricing
Misconceptions• Not Highest Price• Total, Not Unit, Profit• Possibility of Losses
Graphically…
24 - 12Copyright 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
PreviousSlide
NextSlide
EndShow
Profit Maximization Under Monopoly
D
MC
ATC
MR
$94
$122Profit
MR = MC
ProfitPer 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
Pri
ce,
cost
s, a
nd
rev
enu
e
Remember the MR=MC Rule?
24 - 13Copyright 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
PreviousSlide
NextSlide
EndShow
Loss Minimization Under Monopoly
D
MCATC
MR
APm
Loss
MR = MC
LossPer 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
Pri
ce,
cost
s, a
nd
rev
enu
e
AVC
Qm
V
Since Pm exceeds AVC,the firm will produce
24 - 14Copyright 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
PreviousSlide
NextSlide
EndShow
Q
INEFFICIENCY OF PURE MONOPOLY
P
DMR
S = MC
Pc
Pm
QcQm
At MR=MCA monopolistwill sell less
units at ahigher price
than incompetition
An industry in pure competitionsells where supply and
demand are equal
24 - 15Copyright 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
PreviousSlide
NextSlide
EndShow
ConditionsMonopoly PowerMarket SegregationNo Resale
ConsequencesMore ProfitMore Production
PRICE DISCRIMINATION
Graphically…
24 - 16Copyright 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
PreviousSlide
NextSlide
EndShow
Q
DMR
MC
ATC
P
Q1
Pri
ce a
nd
Co
sts
Economic profits witha single MR=MC
price
PRICE DISCRIMINATION
24 - 17Copyright 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
PreviousSlide
NextSlide
EndShow
Q
D
MC
ATC
P
Q1
Pri
ce a
nd
Co
sts
Economic profits withprice discrimination
PRICE DISCRIMINATION
Q2
MR=D
24 - 18Copyright 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
PreviousSlide
NextSlide
EndShow
Natural MonopoliesRate RegulationSocially Optimum Price
P = MCFair-Return Price
P = ATCDilemma of Regulation
REGULATED MONOPOLY
Graphically…
24 - 19Copyright 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
PreviousSlide
NextSlide
EndShow
REGULATED MONOPOLY
Q
D
MR
MCATC
P
Pri
ce a
nd
Co
sts
MR = MC
Fair-Return Price
Socially-OptimumPrice
Qm Qf Qr
Dilemma of RegulationWhich Price?
Pm
Pf
Pr