Possible Barriers to Entry
“a market served by a single firm”
14 Monopoly
Possible Barriers to Entry (cont.)
Monopolist’s Marginal Revenue
999
1,000
1,001
Q
$14.01
$14.00
$13.99
PriceMargRev
Revenue
Demand for New Drug:Slope = $0.01/dose
800
900
1,000
1,100
1,200
Q
$16
$15
$14
$13
$12
PriceMargRev
Monopolist’s Marginal Revenue
7 8 9 10 11 12 13
Doses of drug (100s)
Pri
ce (
$)
2
4
6
8
10
12
14
16
18 Slope$0.01/dose
MR = price + (quantity x slope)
$16 + ( 800 x -$0.01 )
Market Demand
Marginal Revenue
800
900
1,000
1,100
1,200
Q
16
15
14
13
12
Price
$6,165
$6,300
$6,165
$5,740
$5,000
Profit
$8
$6
$4
$2
$0
MargRev
MargCost
$5.30
$6.00
$6.70
$7.80
$9.00
Monopoly: price decreases with quantity
Monopolist’s Output Decision
Output
Cost
or
Pri
ce (
$)
300 600 900 1200 1500
3
6
9
12
15
18
21
24Average cost
Profit for Different Output Decisions
Market Demand
Output
Cost
or
Pri
ce (
$)
300 600 900 1200 1500
3
6
9
12
15
18
21
24Average cost
Profit for Different Output Decisions
Market Demand
Output
Cost
or
Pri
ce (
$)
300 600 900 1200 1500
3
6
9
12
15
18
21
24Average cost
Profit for Different Output Decisions
Market Demand
Output
Cost
or
Reven
ue (
$)
300 600 900 1200 1500
3
6
9
12
15
18
21
24
Marginal cost
Monopolist’s Output Decision
Marginal Revenue
Market Demand
Monopoly quantity &
price
Output
Pri
ce (
$)
200 400 600 800 1000
5
10
15
20
25
30
35
40
Constant-Cost Industry
Average Cost = Marginal Cost
Market Demand
Marginal Revenue
Monopoly quantity &
price
Perfect competition
quantity & price
Output
Pri
ce (
$)
200 400 600 800 1000
5
10
15
20
25
30
35
40
Perfect Competition: Constant-Cost Industry
Average Cost = Marginal Cost
Market Demand
Output
Pri
ce (
$)
200 400 600 800 1000
5
10
15
20
25
30
35
40
Monopoly: Constant-Cost Industry
Average Cost = Marginal Cost
Market Demand Deadweight
loss from monopoly
Output
Pri
ce (
$)
200 400 600 800 1000
5
10
15
20
25
30
35
40
Monopoly with Price Discrimination
Average Cost = Marginal Cost
Market Demand
Deadweight loss
Patents
government-protected monopolies
provide monopoly profits to a firm
encourages R&D and innovation
Natural Monopolies
economies of scale for very large operations
inefficient for two firms to provide service
government often sets maximum price
Output
Cost
or
Reven
ue (
$)
100 200 300 400 500
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00MR
Demand
MC
ATC
Regulating the Natural Monopoly
ATC slopes downward: large economies of scale
Monopolist would choose a price to maximize profit.
Output
Cost
or
Reven
ue (
$)
100 200 300 400 500
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00MR
Demand
MC
ATC
Regulating the Natural Monopoly
Regulators will set a lower price…
… that satisfies the monopolist and maximizes
total surplus