Four Market Models
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
11
C HAPTE R
Monopoly Revenues
& Costs
Output & Price
Discrimination
Inefficiency of Pure
Monopoly
Price Discrimination
Regulated Monopoly
Key Terms
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End
Show
11 - 1
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
Pure
Monopoly
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
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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 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
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End
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11 - 3
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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 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
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End
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11 - 4
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BARRIERS TO ENTRY
Economies of Scale
• The Natural Monopoly Case
• Minimum Efficient Scale
Legal Barriers to Entry
• Patents
• Licenses
Ownership or Control of
Essential Resources
Pricing and Other Strategic
Barriers to Entry
Copyright McGraw-Hill/Irwin, 2005
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
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11 - 5
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Average Total Cost
Barriers to Entry
$20
15
ATC
10
If ATC declines over extended
output, least-cost production is
realized only if there is one
producer - a natural monopoly.
0
50
Copyright McGraw-Hill/Irwin, 2005
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
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End
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11 - 6
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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 McGraw-Hill/Irwin, 2005
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
D
Regulated Monopoly
Gain = $132
Key Terms
Previous
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End
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11 - 7
Next
Slide
1
2
Copyright McGraw-Hill/Irwin, 2005
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
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11 - 8
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Marginal Revenue
Gain = $132
$142 - $30 = $102
will necessarily be
less than price $132.
1
2
Copyright McGraw-Hill/Irwin, 2005
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 Revenue
0 x $172 = $ 0
Monopoly Revenues
& Costs
Output & Price
Discrimination
Inefficiency of Pure
Monopoly
Price Discrimination
Regulated Monopoly
Key Terms
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End
Show
11 - 9
Next
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Copyright McGraw-Hill/Irwin, 2005
Cost Data
Average
Total
Cost
Profit +
Total Marginal or
loss Cost
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 Revenue
Cost Data
Average
Total
Cost
Profit +
Total Marginal or
loss Cost
Cost
0 $172 $ 0
$100 90 - $100
] $162
]
x
1
162 = 162
- 28
$190.00 190 =
Output & Price
Discrimination
Inefficiency of Pure
Monopoly
MR = $162 – 0 = $162
Price Discrimination
MR > MC
Loss Improvement
from -$100 to -$28
Check next unit of
output!
Regulated Monopoly
Key Terms
Previous
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End
Show
11 - 10
MC = $190 – 100 = $90
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
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
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End
Show
11 - 11
Next
Slide
Quantity Price
of (Average Total
Marginal
Output Revenue) Revenue Revenue
0
1
2
3
4
5
6
7
8
9
10
$172 $ 0
]
162 162
]
152 304
]
142 426
]
132 528
]
122 610
]
112 672
]
102 714 ]
92 736 ]
82 738 ]
72 720
Copyright McGraw-Hill/Irwin, 2005
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
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
- 14
- 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
Can0 you
$172see
$ profit
0
] $162
1
162 162
maximization?
] 142
Inefficiency of Pure
Monopoly
Price Discrimination
Regulated Monopoly
Key Terms
Previous
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End
Show
11 - 12
Quantity Price
of (Average Total
Marginal
Output Revenue) 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 McGraw-Hill/Irwin, 2005
Cost Data
Average
Total
Cost
Profit +
Total Marginal or
loss Cost
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
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End
Show
11 - 13
Next
Slide
Quantity Price
of (Average Total
Marginal
Output Revenue) Revenue Revenue
0
1
2
3
4
5
6
7
8
9
10
$172 $ 0
]
162 162
]
152 304
]
142 426
]
132 528
]
122 610
]
112 672
]
102 714 ]
92 736 ]
82 738 ]
72 720
Copyright McGraw-Hill/Irwin, 2005
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
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
- 14
- 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
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End
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11 - 14
Next
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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 McGraw-Hill/Irwin, 2005
MONOPOLY REVENUES & COSTS
Elastic
$200
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Dollars
Four Market Models
Monopoly Revenues
& Costs
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
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End
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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 McGraw-Hill/Irwin, 2005
MONOPOLY REVENUES & COSTS
Elastic
Inelastic
$200
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Dollars
Four Market Models
Monopoly Revenues
& Costs
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
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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 McGraw-Hill/Irwin, 2005
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
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End
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11 - 17
Next
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Cost Data
MR = MC Rule
No Monopoly Supply Curve
Monopoly Pricing
Misconceptions
• Not Highest Price
• Total, Not Unit, Profit
• Possibility of Losses
Graphically…
Copyright McGraw-Hill/Irwin, 2005
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
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End
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11 - 18
Next
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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 McGraw-Hill/Irwin, 2005
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
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End
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11 - 19
Next
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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 McGraw-Hill/Irwin, 2005
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 exceedsLoss
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
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End
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11 - 20
Next
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175
Price, costs, and revenue
The Natural
Monopoly Case
MC
ATC
AVC
150
A
125 Loss
Pm
100
V
D
75
50
MR = MC
25
0
1
Copyright McGraw-Hill/Irwin, 2005
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
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End
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11 - 21
Next
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What are the MC
ATC
A
Economic
EffectsAVC
P
V of Monopoly?
175
Price, costs, and revenue
The Natural
Monopoly Case
150
Loss
125
m
100
D
75
50
MR = MC
25
0
1
Copyright McGraw-Hill/Irwin, 2005
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
Pm
Output & Price
Discrimination
Pc
Inefficiency of Pure
Monopoly
Price Discrimination
Regulated Monopoly
Key Terms
D
Previous
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End
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11 - 22
Next
Slide
MR
Qm
Copyright McGraw-Hill/Irwin, 2005
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
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End
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11 - 23
Next
Slide
MR
Qm
Copyright McGraw-Hill/Irwin, 2005
Qc
Q
COST COMPLICATIONS
Four Market Models
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Economies of Scale
Simultaneous Consumption
Network Effects
X-Inefficiency Inefficient internal
Output & Price
Discrimination
Inefficiency of Pure
Monopoly
Price Discrimination
Regulated Monopoly
Key Terms
Previous
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End
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11 - 24
Next
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Average total costs
Monopoly Revenues
& Costs
ATCx
X
operation leads to
higher-thannecessary costs.
X’
ATC1
ATCx’
ATC2
Q1 Quantity
Copyright McGraw-Hill/Irwin, 2005
Q2
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
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End
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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 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
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End
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11 - 26
Next
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PRICE DISCRIMINATION
Conditions
Monopoly Power
Market Segregation
No Resale
Consequences
More Profit
More Production
Graphically…
Copyright McGraw-Hill/Irwin, 2005
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
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End
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11 - 27
Price and Costs
Barriers to Entry
Economic profits with
a single MR=MC
price
ATC
Next
Slide
MR
Q1
Copyright McGraw-Hill/Irwin, 2005
MC
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
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End
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11 - 28
Price and Costs
Barriers to Entry
A perfectly discriminating
monopolist has MR=D,
producing more product
and more profit!
MC
ATC
MR=D
D
Next
Slide
Q1
Copyright McGraw-Hill/Irwin, 2005
Q2
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
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End
Show
11 - 29
Price and Costs
Barriers to Entry
Economic profits with
price discrimination
MC
ATC
MR=D
D
Next
Slide
Q1
Copyright McGraw-Hill/Irwin, 2005
Q2
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
Key Terms
Previous
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End
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11 - 30
REGULATED MONOPOLY
Natural Monopolies
Rate Regulation
Socially Optimum Price
P = MC
Fair-Return Price
P = ATC
Next
Slide
Dilemma of Regulation
Graphically…
Copyright McGraw-Hill/Irwin, 2005
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
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End
Show
11 - 31
Next
Slide
MR
Qm
Copyright McGraw-Hill/Irwin, 2005
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
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End
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11 - 32
Next
Slide
MR
Qf
Copyright McGraw-Hill/Irwin, 2005
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
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End
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11 - 33
Next
Slide
MR
Qr
Copyright McGraw-Hill/Irwin, 2005
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
Price and Costs
Barriers to Entry
Dilemma of Regulation
MR = MC Which Price?
Pm
Socially-Optimum
Price
ATC
MC
Pf
Pr
D
Previous
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End
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11 - 34
Next
Slide
MR
Qm
Copyright McGraw-Hill/Irwin, 2005
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 McGraw-Hill/Irwin, 2005
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 - 36
Monopolistic
Competition
& Oligopoly
Next
Slide
Chapter 12
Copyright McGraw-Hill/Irwin, 2005