Four Market Models Monopoly Examples Barriers to Entry

Four Market Models Monopoly Examples Barriers to Entry The Natural Monopoly Case Monopoly Demand 11 Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 11 - 1 Pure Monopoly CHAPTER Next Slide Copyright Mc. Graw-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 Pure Competition Key Terms Previous Slide End Show 11 - 2 FOUR MARKET MODELS Pure Monopoly: • Single Seller • No Close Substitutes • Price Maker • Blocked Entry • Nonprice Competition Next Slide Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum Copyright Mc. Graw-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 Previous Slide End Show 11 - 3 Next Slide MONOPOLY EXAMPLES Pure Monopoly Regulated Monopoly Near Monopolies Dual Objectives of the Study • Monopoly as a Market Structure • To Better Understand Other Market Structures Copyright Mc. Graw-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 Previous Slide End Show 11 - 4 Next Slide BARRIERS TO ENTRY Economies of Scale • The Natural Monopoly Case Legal Barriers to Entry • Patents • Licenses Ownership or Control of Essential Resources Pricing and Other Strategic Barriers to Entry Copyright Mc. Graw-Hill/Irwin, 2002

THE NATURAL MONOPOLY CASE Four Market Models Monopoly Examples The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 11 - 5 Next Slide Average Total Cost Barriers to Entry $20 15 10 0 ATC If ATC declines over extended output, least-cost production is realized only if there is one producer - a natural monopoly 50 Copyright Mc. Graw-Hill/Irwin, 2002 100 Quantity 200

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 End Show 11 - 6 Next Slide 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 Copyright Mc. Graw-Hill/Irwin, 2002

MONOPOLY DEMAND P Four Market Models Monopoly Examples Barriers to Entry The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination As price decreases from $142 to $132. . . but revenue will $142 Loss = $30 increase with the 132 additional unit sold Inefficiency of Pure Monopoly D Price Discrimination Regulated Monopoly Gain = $132 Key Terms Previous Slide End Show 11 - 7 Next Slide 1 2 Copyright Mc. Graw-Hill/Irwin, 2002 3 4 5 6 Q

MONOPOLY DEMAND P Four Market Models Monopoly Examples Barriers to Entry The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination As price decreases from $142 to $132. . . but revenue will $142 Loss = $30 increase with the 132 additional unit sold Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 11 - 8 Next Slide Marginal Revenue Gain = $132 $142 - $30 = $102 will necessarily be less than price $132 1 2 Copyright Mc. Graw-Hill/Irwin, 2002 3 4 5 6 Q D

MONOPOLY REVENUES & COSTS Revenue Data Four Market Models Monopoly Examples Barriers to Entry The Natural Monopoly Case Monopoly Demand Quantity Price of (Average Total Marginal Output Revenue) Revenue 0 x $172 = $ 0 Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 11 - 9 Next Slide Copyright Mc. Graw-Hill/Irwin, 2002 Cost Data Average Total Cost Profit + Total Marginal or loss Cost - $100 = - $100

MONOPOLY REVENUES & COSTS Revenue Data Four Market Models Monopoly Examples Barriers to Entry The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Quantity Price of (Average Total Marginal Output Revenue) Revenue Cost Data Average Total Cost Profit + Total Marginal or loss Cost 0 $172 $ 0 $100 90 - $100 ] $162 ] x 1 162 = 162 - 28 $190. 00 190 = Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination MR = $162 – 0 = $162 MR > MC Loss Improvement from -$100 to -$28 Check next unit of output! Regulated Monopoly Key Terms Previous Slide End Show 11 - 10 MC = $190 – 100 = $90 Next Slide Copyright Mc. Graw-Hill/Irwin, 2002

MONOPOLY REVENUES & COSTS Revenue Data 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 End Show 11 - 11 Next Slide Quantity Price of (Average Total Marginal Output Revenue) Revenue 0 1 2 3 4 5 6 7 8 9 10 $172 $ 0 ] 162 ] 152 304 ] 142 426 ] 132 528 ] 122 610 ] 112 672 ] 102 714 ] 92 736 ] 82 738 ] 72 720 Copyright Mc. Graw-Hill/Irwin, 2002 Cost Data Average Total Cost $162 $190. 00 142 135. 00 122 113. 33 102 100. 00 82 94. 00 62 91. 67 42 91. 43 22 93. 73 2 97. 78 - 18 103. 00 Profit + Total Marginal or loss Cost $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 - 142 - 310

MONOPOLY REVENUES & COSTS Revenue Data Four Market Models Monopoly Examples Barriers to Entry The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Can 0 you $172 see $ profit 0 ] $162 1 162 maximization? ] 142 Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 11 - 12 Quantity Price of (Average Total Marginal Output Revenue) Revenue Next Slide 2 3 4 5 6 7 8 9 10 152 142 132 122 112 102 92 82 72 304 ] 122 426 ] 102 528 ] 82 610 ] 62 672 ] 42 714 ] 22 736 ] 2 738 ] - 18 720 Copyright Mc. Graw-Hill/Irwin, 2002 Cost Data Average Total Cost Profit + Total Marginal or loss Cost $100 90 - $100 ]= MC MR > - 28 $190. 00 190 80 ] 135. 00 270 70 + 34 ] 113. 33 340 60 + 86 ] 100. 00 400 70 + 128 ] 94. 00 470 80 + 140 ] 91. 67 550 90 + 122 ] 91. 43 640 110 + 74 ] - 14 93. 73 750 ] 130 97. 78 880 ] 150 - 142 - 310 103. 00 1030

MONOPOLY REVENUES & COSTS Revenue Data 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 End Show 11 - 13 Next Slide Quantity Price of (Average Total Marginal Output Revenue) Revenue 0 1 2 3 4 5 6 7 8 9 10 $172 $ 0 ] 162 ] 152 304 ] 142 426 ] 132 528 ] 122 610 ] 112 672 ] 102 714 ] 92 736 ] 82 738 ] 72 720 Copyright Mc. Graw-Hill/Irwin, 2002 Cost Data Average Total Cost $162 $190. 00 142 135. 00 122 113. 33 102 100. 00 82 94. 00 62 91. 67 42 91. 43 22 93. 73 2 97. 78 - 18 103. 00 Profit + Total Marginal or loss Cost $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 - 142 - 310

MONOPOLY REVENUES & COSTS $200 Monopoly Examples Barriers to Entry The Natural Monopoly Case Monopoly Demand Dollars Four Market Models Monopoly Revenues & Costs 150 200 50 Output & Price Discrimination 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q Inefficiency of Pure Monopoly $750 Regulated Monopoly Key Terms Previous Slide End Show 11 - 14 Next Slide Dollars Price Discrimination 500 250 Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Copyright Mc. Graw-Hill/Irwin, 2002

MONOPOLY REVENUES & COSTS $200 Monopoly Examples Barriers to Entry The Natural Monopoly Case Monopoly Demand Dollars Four Market Models Monopoly Revenues & Costs Elastic 150 200 MR 50 Output & Price Discrimination D 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q Inefficiency of Pure Monopoly $750 Regulated Monopoly Key Terms Previous Slide End Show 11 - 15 Next Slide Dollars Price Discrimination 500 TR 250 Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Copyright Mc. Graw-Hill/Irwin, 2002

MONOPOLY REVENUES & COSTS $200 Monopoly Examples Barriers to Entry The Natural Monopoly Case Monopoly Demand Dollars Four Market Models Monopoly Revenues & Costs Elastic Inelastic 150 200 MR 50 Output & Price Discrimination D 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q Inefficiency of Pure Monopoly $750 Regulated Monopoly Key Terms Previous Slide End Show 11 - 16 Next Slide Dollars Price Discrimination 500 TR 250 Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Copyright Mc. Graw-Hill/Irwin, 2002

OUTPUT AND PRICE DETERMINATION 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 End Show 11 - 17 Next Slide Cost Data MR = MC Rule No Monopoly Supply Curve Monopoly Pricing Misconceptions • Not Highest Price • Total, Not Unit, Profit • Possibility of Losses Graphically… Copyright Mc. Graw-Hill/Irwin, 2002

OUTPUT AND PRICE DETERMINATION Profit Maximization Under Monopoly Four Market Models Monopoly Examples Remember the MR=MC Rule? 200 Barriers to Entry Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 11 - 18 Next Slide Profit Per Unit 175 Price, costs, and revenue The Natural Monopoly Case 150 $122 125 $94 100 MC Profit ATC D 75 50 MR = MC 25 0 1 Copyright Mc. Graw-Hill/Irwin, 2002 2 3 4 MR 5 6 7 8 9 10 Q

OUTPUT AND PRICE DETERMINATION Profit Maximization Under Monopoly Four Market Models 200 Monopoly Examples Barriers to Entry Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 11 - 19 Next Slide Profit Per Unit 175 Price, costs, and revenue The Natural Monopoly Case 150 MC What About $122 Loss Minimization? Profit ATC $94 125 100 D 75 50 MR = MC 25 0 1 Copyright Mc. Graw-Hill/Irwin, 2002 2 3 4 MR 5 6 7 8 9 10 Q

OUTPUT AND PRICE DETERMINATION Loss Minimization Under Monopoly Four Market Models 200 Monopoly Examples Since Pm exceeds. Loss AVC, Per Unit the firm will produce Barriers to Entry Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 11 - 20 Next Slide 175 Price, costs, and revenue The Natural Monopoly Case MC ATC AVC 150 A 125 Loss Pm V 100 D 75 50 MR = MC 25 0 1 Copyright Mc. Graw-Hill/Irwin, 2002 2 3 4 MR 5 Qm 6 7 8 9 10 Q

OUTPUT AND PRICE DETERMINATION Loss Minimization Under Monopoly Four Market Models 200 Monopoly Examples Loss Per Unit Barriers to Entry Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 11 - 21 Next Slide 175 Price, costs, and revenue The Natural Monopoly Case What are the A P Economic Effects V of Monopoly? D MC ATC AVC 150 Loss 125 m 100 75 50 MR = MC 25 0 1 Copyright Mc. Graw-Hill/Irwin, 2002 2 3 4 MR 5 Qm 6 7 8 9 10 Q

INEFFICIENCY OF PURE MONOPOLY P An industry in pure competition S = MC sells where supply and Four Market Models demand are equal Monopoly Examples Barriers to Entry At MR=MC A monopolist will sell less units at a higher price than in competition The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Pm Pc Price Discrimination Regulated Monopoly Key Terms D Previous Slide End Show 11 - 22 Next Slide MR Copyright Mc. Graw-Hill/Irwin, 2002 Qm Qc Q

INEFFICIENCY OF PURE MONOPOLY P S = MC 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 At MR=MC A monopolist will sell less Pm Monopoly pricing effectively units at a higher price Pccreates an income transfer from than in buyers to the seller! competition Regulated Monopoly Key Terms D Previous Slide End Show 11 - 23 Next Slide MR Copyright Mc. Graw-Hill/Irwin, 2002 Qm Qc Q

COST COMPLICATIONS 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 End Show 11 - 24 Next Slide Average total costs Four Market Models Economies of Scale Simultaneous Consumption Network Effects X-Inefficiency Inefficient internal ATCx X operation leads to higher-thannecessary costs X’ ATC 1 ATCx’ ATC 2 Copyright Mc. Graw-Hill/Irwin, 2002 Q 1 Quantity Q 2 Average Total Costs

COST COMPLICATIONS 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 End Show 11 - 25 Next Slide 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 Copyright Mc. Graw-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 Previous Slide End Show 11 - 26 Next Slide PRICE DISCRIMINATION Conditions Monopoly Power Market Segregation No Resale Consequences More Profit More Production Graphically… Copyright Mc. Graw-Hill/Irwin, 2002

PRICE DISCRIMINATION Four Market Models P Monopoly Examples The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 11 - 27 Price and Costs Barriers to Entry Economic profits with a single MR=MC price ATC Next Slide MR Copyright Mc. Graw-Hill/Irwin, 2002 MC Q 1 D Q

PRICE DISCRIMINATION Four Market Models P Monopoly Examples The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 11 - 28 Price and Costs Barriers to Entry A perfectly discriminating monopolist has MR=D, producing more product and more profit! ATC MR=D D Next Slide Copyright Mc. Graw-Hill/Irwin, 2002 MC Q 1 Q 2 Q

PRICE DISCRIMINATION Four Market Models P Monopoly Examples The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Previous Slide End Show 11 - 29 Price and Costs Barriers to Entry Economic profits with price discrimination ATC MR=D D Next Slide Copyright Mc. Graw-Hill/Irwin, 2002 MC Q 1 Q 2 Q

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 End Show 11 - 30 Rate Regulation Socially Optimum Price P = MC Fair-Return Price P = ATC Key Terms Previous Slide REGULATED MONOPOLY Natural Monopolies Next Slide Dilemma of Regulation Copyright Mc. Graw-Hill/Irwin, 2002 Graphically…

REGULATED MONOPOLY P Four Market Models Monopoly Examples Monopoly Price MR = MC The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Price and Costs Barriers to Entry Pm ATC MC D Previous Slide End Show 11 - 31 Next Slide MR Qm Copyright Mc. Graw-Hill/Irwin, 2002 Q

REGULATED MONOPOLY P Four Market Models Monopoly Examples The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Price and Costs Barriers to Entry Fair-Return Price Normal Profit Only ATC MC Pf D Previous Slide End Show 11 - 32 Next Slide MR Qf Copyright Mc. Graw-Hill/Irwin, 2002 Q

REGULATED MONOPOLY P Four Market Models Monopoly Examples The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Price and Costs Barriers to Entry Socially-Optimum Price P = MC ATC MC Pr D Previous Slide End Show 11 - 33 Next Slide MR Qr Copyright Mc. Graw-Hill/Irwin, 2002 Q

REGULATED MONOPOLY P Four Market Models Monopoly Examples The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Fair-Return Price and Costs Barriers to Entry Dilemma of Regulation MR = MC Which Price? Pm Socially-Optimum Price ATC MC Pf Pr D Previous Slide End Show 11 - 34 Next Slide MR Qm Copyright Mc. Graw-Hill/Irwin, 2002 Qf Qr Q

REGULATED MONOPOLY P Four Market Models Monopoly Examples The Natural Monopoly Case Monopoly Demand Monopoly Revenues & Costs Output & Price Discrimination Inefficiency of Pure Monopoly Price Discrimination Regulated Monopoly Key Terms Price and Costs Barriers to Entry Pm Pf Pr Dilemma of Regulation MR = MC Which Price? Fair-Return Price Chapter. Socially-Optimum Price Conclusions MCATC D Previous Slide End Show 11 - 35 Next Slide MR Qm Copyright Mc. Graw-Hill/Irwin, 2002 Qf Qr Q

pure monopoly barriers to entry simultaneous consumption network effects X-inefficiency rent-seeking behavior price discrimination socially optimal price fair-return price Copyright Mc. Graw-Hill/Irwin 2002 BACK END

Next 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 End Show 11 - 37 Monopolistic Competition & Oligopoly Next Slide Chapter 25 Copyright Mc. Graw-Hill/Irwin, 2002