Post on 29-Dec-2015
11 - 1Copyright 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
PreviousSlide
NextSlide
EndShow
Pure Monopoly
11C H A P T E R
11 - 2Copyright 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
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
11 - 3Copyright 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
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
11 - 4Copyright 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
PreviousSlide
NextSlide
EndShow
BARRIERS TO ENTRYEconomies of Scale
• The Natural Monopoly Case• Minimum Efficient Scale
Legal Barriers to Entry• Patents• Licenses
Ownership or Control of Essential ResourcesPricing and Other Strategic Barriers to Entry
11 - 5Copyright 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
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
11 - 6Copyright 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
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
11 - 7Copyright 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
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.
11 - 8Copyright 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
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.
Marginal Revenue$142 - $30 = $102
will necessarily beless than price $132.
11 - 9Copyright 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
PreviousSlide
NextSlide
EndShow
MONOPOLY REVENUES & COSTS
MarginalRevenue
0
Quantityof
Output
Price(AverageRevenue)
TotalRevenue
MarginalCost
Profit +or
loss -
$172 $ 0 - $100
AverageTotalCost
TotalCost
$100
Revenue Data Cost Data
x = - =
11 - 10Copyright 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
PreviousSlide
NextSlide
EndShow
0 $172 $ 0 - $100$100
MONOPOLY REVENUES & COSTS
MarginalRevenue
0 1
90
Quantityof
Output
Price(AverageRevenue)
TotalRevenue
MarginalCost
Profit +or
loss -
$172 162
$ 0162
$162 - $100- 28
AverageTotalCost
$190.00
TotalCost
$100190
] ]
Revenue Data Cost Data
x = - =
MR = $162 – 0 = $162 MC = $190 – 100 = $90MR > MC
Loss Improvementfrom -$100 to -$28Check next unit of
output!
11 - 11Copyright 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
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
11 - 12Copyright 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
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? MR > = MC
11 - 13Copyright 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
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
11 - 14Copyright 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
PreviousSlide
NextSlide
EndShow
MONOPOLY REVENUES & COSTS
Do
llar
sD
oll
ars
$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
Q0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
11 - 15Copyright 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
PreviousSlide
NextSlide
EndShow
MONOPOLY REVENUES & COSTS
Do
llar
sD
oll
ars
$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
DQ
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
TR
Q
11 - 16Copyright 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
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
11 - 17Copyright 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
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…
11 - 18Copyright 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
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?
11 - 19Copyright 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
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
What About
Loss Minimization?
11 - 20Copyright 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
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
11 - 21Copyright 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
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
What are theEconomic Effects
of Monopoly?
11 - 22Copyright 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
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.
11 - 23Copyright 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
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
Monopoly pricing effectivelycreates an income transfer from
buyers to the seller!
11 - 24Copyright 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
PreviousSlide
NextSlide
EndShow
COST COMPLICATIONS
Av
era
ge
to
tal c
os
ts
Quantity
AverageTotal Costs
X
X’
Q1 Q2
ATCx
ATC1
ATC2
ATCx’
Economies of ScaleSimultaneous ConsumptionNetwork Effects X-Inefficiency Inefficient internal
operation leads tohigher-than-
necessary costs.
11 - 25Copyright 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
PreviousSlide
NextSlide
EndShow
COST COMPLICATIONSEconomies of ScaleSimultaneous ConsumptionNetwork Effects X-InefficiencyRent-Seeking ExpendituresRent-Seeking BehaviorTechnological AdvanceAssessment and Policy OptionsAntitrust ActionRegulate Natural MonopolyIgnore it, if it is Short-Lived
11 - 26Copyright 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
PreviousSlide
NextSlide
EndShow
ConditionsMonopoly PowerMarket SegregationNo Resale
ConsequencesMore ProfitMore Production
PRICE DISCRIMINATION
Graphically…
11 - 27Copyright 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
PreviousSlide
NextSlide
EndShow
Q
DMR
MC
ATC
P
Q1
Pri
ce a
nd
Co
sts
Economic profits witha single MR=MC
price
PRICE DISCRIMINATION
11 - 28Copyright 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
PreviousSlide
NextSlide
EndShow
Q
D
MC
ATC
P
Q1
Pri
ce a
nd
Co
sts
PRICE DISCRIMINATION
Q2
A perfectly discriminatingmonopolist has MR=D,producing more product
and more profit!
MR=D
11 - 29Copyright 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
PreviousSlide
NextSlide
EndShow
Q
D
MC
ATC
P
Q1
Pri
ce a
nd
Co
sts
Economic profits withprice discrimination
PRICE DISCRIMINATION
Q2
MR=D
11 - 30Copyright 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
PreviousSlide
NextSlide
EndShow
Natural MonopoliesRate RegulationSocially Optimum Price
P = MCFair-Return Price
P = ATCDilemma of Regulation
REGULATED MONOPOLY
Graphically…
11 - 31Copyright 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
PreviousSlide
NextSlide
EndShow
REGULATED MONOPOLY
Q
D
MR
MCATC
P
Pri
ce a
nd
Co
sts
Monopoly PriceMR = MC
Qm
Pm
11 - 32Copyright 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
PreviousSlide
NextSlide
EndShow
REGULATED MONOPOLY
Q
D
MR
MCATC
P
Pri
ce a
nd
Co
sts
Fair-Return PriceNormal Profit Only
Qf
Pf
11 - 33Copyright 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
PreviousSlide
NextSlide
EndShow
REGULATED MONOPOLY
Q
D
MR
MCATC
P
Pri
ce a
nd
Co
sts
Socially-OptimumPrice
P = MC
Qr
Pr
11 - 34Copyright 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
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
pure monopoly barriers to entrysimultaneous consumptionnetwork effectsX-inefficiencyrent-seeking behaviorprice discriminationsocially optimal pricefair-return price
ENDBACKCopyright McGraw-Hill/Irwin, 2005
11 - 36Copyright 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
PreviousSlide
NextSlide
EndShow
MonopolisticCompetition& Oligopoly
Chapter 12
Next