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