pure monopoly
DESCRIPTION
Pure Monopoly. Pure Monopoly. Pure Competition. Monopolistic Competition. Oligopoly. Market Structure Continuum. FOUR MARKET MODELS. Pure Monopoly:. MONOPOLY EXAMPLES. Pure Monopoly Near Monopoly Natural Monopoly Regulated Monopoly. THE NATURAL MONOPOLY CASE. $20. 15. LRATC. - PowerPoint PPT PresentationTRANSCRIPT
10- 1
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
Pure Monopoly
10- 2
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
Market Structure Continuum
PureCompetition
PureMonopoly
MonopolisticCompetition Oligopoly
FOUR MARKET MODELSPure Monopoly:
10- 3
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
MONOPOLY EXAMPLES• Pure Monopoly• Near Monopoly• Natural Monopoly • Regulated Monopoly
10- 4
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
Aver
age
Tota
l Cos
t
Quantity
$20
15
10
0 50 100 200
LRATCIf LRATC declines over extended output, least-cost production is realized only if there is one producer - a natural monopoly.
THE NATURAL MONOPOLY CASE
10- 5
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated 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
10- 6
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
MONOPOLY3 Basic Assumptions:
• Monopoly Status is Secure
• No Government Regulation
• Firm Charges the Same Price for all Units Sold
10- 7
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
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 = - =
10- 8
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
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!
10- 9
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
MONOPOLY REVENUES & COSTS
MarginalRevenue
0 1 23456789
10
90807060708090
110130150
Quantityof
Output
Price(AverageRevenue)
TotalRevenue
MarginalCost
Profit +or
loss -
$172 162 152142132122112102928272
$ 0162304426528610672714736738720
$162142122102
82624222
2- 18
- $100- 28+ 34+ 86
+ 128+ 140+ 122
+ 74- 14
- 142- 310
AverageTotalCost
$190.00135.00113.33100.0094.0091.6791.4393.7397.78
103.00
TotalCost
$100190270340400470550640750880
1030
]]]]]]]]]]
]]]]]]]]]]
Revenue Data Cost Data
10- 10
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
MONOPOLY REVENUES & COSTS
MarginalRevenue
0 1 23456789
10
90807060708090
110130150
Quantityof
Output
Price(AverageRevenue)
TotalRevenue
MarginalCost
Profit +or
loss -
$172 162 152142132122112102928272
$ 0162304426528610672714736738720
$162142122102
82624222
2- 18
- $100- 28+ 34+ 86
+ 128+ 140+ 122
+ 74- 14
- 142- 310
AverageTotalCost
$190.00135.00113.33100.0094.0091.6791.4393.7397.78
103.00
TotalCost
$100190270340400470550640750880
1030
]]]]]]]]]]
]]]]]]]]]]
Revenue Data Cost Data
Can you see profitmaximization? MR > = MC
10- 11
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
MONOPOLY REVENUES & COSTS
Dol
lars
$200
150
100
50
Q0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
10- 12
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
MONOPOLY REVENUES & COSTS
Dol
lars
$200
150
100
50 MR
Elastic
DARPQ
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
10- 13
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
MONOPOLY REVENUES & COSTS
Dol
lars
$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 18Q
• MR bisects DARP• When MR = 0 Total Revenue is
Maximized• When MR is positive D is elastic• When MR is negative D is inelastic
10- 14
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated 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…
10- 15
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
Profit Maximization Under Monopoly
DARP
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
Pric
e, c
osts
, and
reve
nue
10- 16
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
Profit Maximization Under Monopoly
DARP
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
Pric
e, c
osts
, and
reve
nue
What About
Loss Minimization?
10- 17
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
Loss Minimization Under Monopoly
DARP
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
Pric
e, c
osts
, and
reve
nue
AVC
Qm
V
Since Pm exceeds AVC,the firm will produce
10- 18
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
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
Pric
e, c
osts
, and
reve
nue
AVC
Qm
V
What are theEconomic Effects
of Monopoly?
10- 19
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly Q
INEFFICIENCY OF PURE MONOPOLYP
DARP
MR
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
10- 20
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly Q
INEFFICIENCY OF PURE MONOPOLYP
DARP
MR
S = MC
Pc
Pm
QcQm
At MR=MCA monopolistwill sell less
units at ahigher price
than incompetition
Monopoly pricing effectivelycreates a welfare transfer from buyers to the seller!
10- 21
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
COST COMPLICATIONSEconomies of Scale• Simultaneous consumption• Network effectsDiseconomies of Scale• X-Inefficiency• Rent-Seeking Behavior• Technological Advance
10- 22
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
Conditions•Monopoly Power•Market Segregation•No Resale
Consequences•More Profit•More Production
PRICE DISCRIMINATION
Graphically…
10- 23
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly Q
DARPMR
MC
ATC
P
Q1
Pric
e an
d C
osts
Economic profits witha single MR=MC
price
PRICE DISCRIMINATION
10- 24
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly Q
DARP
MC
ATC
P
Q1
Pric
e an
d C
osts
PRICE DISCRIMINATION
Q2
A perfectly discriminatingmonopolist has MR=D,
producing more productand more profit!
MR=D
10- 25
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly Q
DARP
MC
ATC
P
Q1
Pric
e an
d C
osts
Economic profits withprice discrimination
PRICE DISCRIMINATION
Q2
MR=D
10- 26
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
10- 27
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
Monopoly Assessment& Policy Options
Antitrust Action•Sherman Act•Clayton Act•Ignore it, if it is short lived•Regulate Natural Monopolies
10- 28
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
Natural Monopolies
Socially Optimum PriceP = MCFair-Return PriceP = ATC
REGULATED MONOPOLY
Graphically…
10- 29
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
REGULATED MONOPOLY
Q
DARPMR
MCATC
P
Pric
e an
d C
osts
Monopoly PriceMR = MC
Qm
Pm
10- 30
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
REGULATED MONOPOLY
Q
DARPMR
MCATC
P
Pric
e an
d C
osts
Fair-Return PriceNormal Profit Only
Qf
Pf
10- 31
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
REGULATED MONOPOLY
Q
DARPMR
MCATC
P
Pric
e an
d C
osts
Socially-OptimumPrice
P = MC
Qr
Pr
10- 32
Four Market ModelsMonopoly ExamplesBarriers to EntryThe Natural Monopoly CaseMonopoly DemandMonopoly Revenues & CostsOutput & Price DiscriminationInefficiency of Pure MonopolyPrice DiscriminationRegulated Monopoly
REGULATED MONOPOLY
Q
DARPMR
MCATC
P
Pric
e an
d C
osts
MR = MC
Fair-Return Price
Socially-OptimumPrice
Qm Qf Qr
Dilemma of RegulationWhich Price?
Pm
Pf
Pr