Four Market Models

Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
24 C HAPTE R Pure
Monopoly
Output & Price
Discrimination
Inefficiency of Pure
Monopoly
Price Discrimination
Regulated Monopoly
Key Terms

Previous Next
Slide Slide
End
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24 - 1
Copyright McGraw-Hill/Irwin, 2005
 FOUR MARKET MODELS
Four Market Models Pure Monopoly:
Monopoly Examples
Barriers to Entry Single Seller
No Close Substitutes
The Natural
Monopoly Case
Monopoly Demand

Price Maker
Monopoly Revenues
& Costs
Output & Price

Blocked Entry
Discrimination
Inefficiency of Pure
Monopoly
Price Discrimination
Regulated Monopoly Nonprice Competition
Key Terms Pure Monopolistic Pure
Competition Competition Oligopoly Monopoly

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End Market Structure Continuum
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Copyright McGraw-Hill/Irwin, 2005
 MONOPOLY EXAMPLES
Four Market Models
Monopoly Examples
Pure Monopoly
Barriers to Entry
The Natural
Monopoly Case
Regulated Monopoly
Monopoly Demand
Monopoly Revenues
& Costs
Near Monopolies
Output & Price
Discrimination Dual Objectives of the Study
Monopoly as a Market
Inefficiency of Pure
Monopoly
Price Discrimination
Regulated Monopoly
Key Terms Structure
Previous Next
To Better Understand
Slide Slide
End
Show
Other Market Structures
24 - 3
Copyright McGraw-Hill/Irwin, 2005
 BARRIERS TO ENTRY
Four Market Models
Economies of Scale
Monopoly Examples
Barriers to Entry
The Natural Monopoly Case
The Natural
Monopoly Case
Minimum Efficient Scale
Monopoly Demand
Monopoly Revenues Legal Barriers to Entry
Patents
& Costs
Output & Price
Discrimination
Inefficiency of Pure
Monopoly Licenses
Price Discrimination
Regulated Monopoly
Key Terms
Ownership or Control of
Essential Resources
Previous
Slide
Next
Slide Pricing and Other Strategic
End
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24 - 4
Barriers to Entry
Copyright McGraw-Hill/Irwin, 2005
 THE NATURAL MONOPOLY CASE
Four Market Models
Monopoly Examples
Barriers to Entry
The Natural
Average Total Cost
Monopoly Case $20
Monopoly Demand
Monopoly Revenues
& Costs 15
Output & Price
Discrimination ATC
Inefficiency of Pure 10
Monopoly
Price Discrimination
If ATC declines over extended
Regulated Monopoly output, least-cost production is
Key Terms
realized only if there is one
Previous Next
producer - a natural monopoly.
Slide Slide
End
0 50 100 200
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24 - 5
Copyright McGraw-Hill/Irwin, 2005
 MONOPOLY DEMAND
Four Market Models 3 Basic Assumptions:
Monopoly Status is Secure
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Demand No Governmental
Monopoly Revenues
& Costs
Output & Price
Discrimination
Regulation
Inefficiency of Pure
Monopoly Firm Charges the Same
Price Discrimination
Regulated Monopoly
Key Terms
Price for all Units Sold
Market Demand Curve is the
Firms Demand Curve
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End
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Copyright McGraw-Hill/Irwin, 2005
 MONOPOLY DEMAND
P
Four Market Models As price decreases from
Monopoly Examples
Barriers to Entry
$142 to $132...
The Natural
Monopoly Case
but revenue will
Monopoly Demand
$142 Loss = $30 increase with the
Monopoly Revenues 132 additional
& Costs
Output & Price
Discrimination unit sold.
Inefficiency of Pure
Monopoly
Price Discrimination
Regulated Monopoly
D
Key Terms
Gain = $132

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End
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24 - 7
Copyright McGraw-Hill/Irwin, 2005
 MONOPOLY DEMAND
P
Four Market Models As price decreases from
Monopoly Examples
Barriers to Entry
$142 to $132...
The Natural
Monopoly Case
but revenue will
Monopoly Demand
$142 Loss = $30 increase with the
Monopoly Revenues 132 additional
& Costs
Output & Price
Discrimination unit sold.
Inefficiency of Pure
Monopoly
Price Discrimination
Regulated Monopoly
Marginal Revenue D
Key Terms
$142 - $30 = $102
Gain = $132

Previous Next will necessarily be

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End less than price $132
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24 - 8
Copyright McGraw-Hill/Irwin, 2005
 MONOPOLY REVENUES & COSTS
Revenue Data Cost Data
Four Market Models Quantity Price Average Profit +
Monopoly Examples of (Average Total Marginal Total Total Marginal or
Barriers to Entry Output Revenue) Revenue Revenue Cost Cost Cost loss -
The Natural
Monopoly Case
Monopoly Demand 0 x $172 = $ 0 - $100 = - $100
Monopoly Revenues
& Costs
Output & Price
Discrimination
Inefficiency of Pure
Monopoly
Price Discrimination
Regulated Monopoly
Key Terms

Previous Next
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End
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24 - 9
Copyright McGraw-Hill/Irwin, 2005
 MONOPOLY REVENUES & COSTS
Revenue Data Cost Data
Four Market Models Quantity Price Average Profit +
Monopoly Examples of (Average Total Marginal Total Total Marginal or
Barriers to Entry Output Revenue) Revenue Revenue Cost Cost Cost loss -
The Natural
Monopoly Case
0 $172 $ 0 $100 90 - $100
Monopoly Demand
] $162 ]
Monopoly Revenues
& Costs
1 x 162 = 162 $190.00 190 =
- - 28
Output & Price
Discrimination
Inefficiency of Pure
Monopoly
MR = $162 0 = $162 MC = $190 100 = $90
Price Discrimination
Regulated Monopoly MR > MC
Loss Improvement
Key Terms

Previous Next from -$100 to -$28

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End
Slide
Check next unit of
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24 - 10
output!
Copyright McGraw-Hill/Irwin, 2005
 MONOPOLY REVENUES & COSTS
Revenue Data Cost Data
Four Market Models Quantity Price Average Profit +
Monopoly Examples of (Average Total Marginal Total Total Marginal or
Barriers to Entry Output Revenue) Revenue Revenue Cost Cost Cost loss -
The Natural
Monopoly Case
0 $172 $ 0 $100 90 - $100
Monopoly Demand
] $162 ]
Monopoly Revenues
1 162 162 $190.00 190 80 - 28
& Costs
] 142 ]
Output & Price 2 152 304 135.00 270 70 + 34
Discrimination ] 122 ]
3 142 426 113.33 340 60 + 86
Inefficiency of Pure
] 102 ]
4 132 528 100.00 400 + 128
Monopoly
Price Discrimination
] 82 ] 70
Regulated Monopoly 5 122 610 94.00 470 80 + 140
] 62 ]
Key Terms
6 112 672 91.67 550 90 + 122
] 42 ]
7 102 714 ] 91.43 640 ] 110 + 74
22
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8 92 736 ] 93.73 750 ] 130 - 14
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2
9 82 738 ] 97.78 880 ] 150 - 142
End
- 18
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24 - 11 10 72 720 103.00 1030 - 310
Copyright McGraw-Hill/Irwin, 2005
 MONOPOLY REVENUES & COSTS
Revenue Data Cost Data
Four Market Models Quantity Price Average Profit +
Monopoly Examples of (Average Total Marginal Total Total Marginal or
Barriers to Entry Output Revenue) Revenue Revenue Cost Cost Cost loss -
The Natural
Monopoly Case
Can0 you
$172see
$ profit
0 $100 90 - $100
Monopoly Demand
] $162 MR > ]= MC
Monopoly Revenues
1 162 162
maximization? $190.00 190 80 - 28
& Costs
] 142 ]
Output & Price 2 152 304 135.00 270 70 + 34
Discrimination ] 122 ]
3 142 426 113.33 340 60 + 86
Inefficiency of Pure
] 102 ]
4 132 528 100.00 400 70 + 128
Monopoly
Price Discrimination
] 82 ]
Regulated Monopoly 5 122 610 94.00 470 80 + 140
] 62 ]
Key Terms
6 112 672 91.67 550 90 + 122
] 42 ]
7 102 714 ] 91.43 640 ] 110 + 74
22
Previous Next
8 92 736 ] 93.73 750 ] 130 - 14
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2
9 82 738 ] 97.78 880 ] 150 - 142
End
- 18
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24 - 12 10 72 720 103.00 1030 - 310
Copyright McGraw-Hill/Irwin, 2005
 MONOPOLY REVENUES & COSTS
Revenue Data Cost Data
Four Market Models Quantity Price Average Profit +
Monopoly Examples of (Average Total Marginal Total Total Marginal or
Barriers to Entry Output Revenue) Revenue Revenue Cost Cost Cost loss -
The Natural
Monopoly Case
0 $172 $ 0 $100 90 - $100
Monopoly Demand
] $162 ]
Monopoly Revenues
1 162 162 $190.00 190 80 - 28
& Costs
] 142 ]
Output & Price 2 152 304 135.00 270 70 + 34
Discrimination ] 122 ]
3 142 426 113.33 340 60 + 86
Inefficiency of Pure
] 102 ]
4 132 528 100.00 400 + 128
Monopoly
Price Discrimination
] 82 ] 70
Regulated Monopoly 5 122 610 94.00 470 80 + 140
] 62 ]
Key Terms
6 112 672 91.67 550 90 + 122
] 42 ]
7 102 714 ] 91.43 640 ] 110 + 74
22
Previous Next
8 92 736 ] 93.73 750 ] 130 - 14
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2
9 82 738 ] 97.78 880 ] 150 - 142
End
- 18
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24 - 13 10 72 720 103.00 1030 - 310
Copyright McGraw-Hill/Irwin, 2005
 MONOPOLY REVENUES & COSTS
$200
Four Market Models
Monopoly Examples

Dollars
150
Barriers to Entry
The Natural
Monopoly Case
200
Monopoly Demand
Monopoly Revenues
& Costs 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
Price Discrimination $750
Regulated Monopoly
Dollars

Key Terms
500

Previous Next
Slide Slide 250

End
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Q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
24 - 14
Copyright McGraw-Hill/Irwin, 2005
 MONOPOLY REVENUES & COSTS
Elastic
$200
Four Market Models
Monopoly Examples

Dollars
150
Barriers to Entry
The Natural
Monopoly Case
200
Monopoly Demand
Monopoly Revenues
& Costs 50 MR D
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
Price Discrimination $750
Regulated Monopoly
Dollars

Key Terms
500

TR
Previous Next
Slide Slide 250

End
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Q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
24 - 15
Copyright McGraw-Hill/Irwin, 2005
 MONOPOLY REVENUES & COSTS
Elastic Inelastic
$200
Four Market Models
Monopoly Examples

Dollars
150
Barriers to Entry
The Natural
Monopoly Case
200
Monopoly Demand
Monopoly Revenues
& Costs 50 MR D
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
Price Discrimination $750
Regulated Monopoly
Dollars

Key Terms
500

TR
Previous Next
Slide Slide 250

End
Show
Q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
24 - 16
Copyright McGraw-Hill/Irwin, 2005
 OUTPUT AND PRICE DETERMINATION

Four Market Models Cost Data

Monopoly Examples
Barriers to Entry
The Natural
MR = MC Rule
Monopoly Case
Monopoly Demand No Monopoly Supply Curve
Monopoly Revenues
& Costs
Output & Price
Monopoly Pricing
Discrimination
Inefficiency of Pure
Monopoly
Misconceptions
Price Discrimination
Regulated Monopoly
Not Highest Price
Key Terms
Total, Not Unit, Profit
Previous Next Possibility of Losses
Graphically
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End
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24 - 17
Copyright McGraw-Hill/Irwin, 2005
 OUTPUT AND PRICE DETERMINATION
Profit Maximization Under Monopoly
Four Market Models
Monopoly Examples
Remember
200
the MR=MC Rule?
Barriers to Entry
The Natural
Monopoly Case
175 Profit
Price, costs, and revenue

Monopoly Demand Per Unit

Monopoly Revenues
150
MC
& Costs
Output & Price 125
Discrimination $122
Inefficiency of Pure 100 Profit ATC
Monopoly $94
Price Discrimination
Regulated Monopoly
75
D
Key Terms
50

Previous Next 25 MR = MC
Slide Slide MR
End
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Copyright McGraw-Hill/Irwin, 2005
 OUTPUT AND PRICE DETERMINATION
Profit Maximization Under Monopoly
Four Market Models
Monopoly Examples 200
Barriers to Entry
The Natural
Monopoly Case
175 Profit
Price, costs, and revenue

Monopoly Demand Per Unit

Monopoly Revenues
150
MC
& Costs
Output & Price 125
Discrimination $122
Inefficiency of Pure 100 Profit ATC
Monopoly $94
Price Discrimination
Regulated Monopoly
75
D
Key Terms
50

Previous Next 25 MR = MC
Slide Slide MR
End
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Copyright McGraw-Hill/Irwin, 2005
 OUTPUT AND PRICE DETERMINATION
Loss Minimization Under Monopoly
Four Market Models
200
Monopoly Examples
Barriers to Entry
Since Pm exceedsLoss
AVC,
Per Unit
The Natural
Monopoly Case
175
the firm will produce
Price, costs, and revenue

Monopoly Demand
150 MC
Monopoly Revenues
& Costs A ATC
125 Loss
Output & Price
Discrimination Pm AVC
Inefficiency of Pure 100
Monopoly
Price Discrimination
V
Regulated Monopoly
75
D
Key Terms
50

Previous Next 25 MR = MC
Slide Slide MR
End
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24 - 20 Qm
Copyright McGraw-Hill/Irwin, 2005
 OUTPUT AND PRICE DETERMINATION
Loss Minimization Under Monopoly
Four Market Models
200
Monopoly Examples
Loss
Barriers to Entry
Per Unit
The Natural
Monopoly Case
What are the MC
175
Price, costs, and revenue

Monopoly Demand
150
Monopoly Revenues
& Costs
Output & Price
Discrimination
Economic
A
P
m
125 EffectsAVC
Loss
ATC

V of Monopoly?
Inefficiency of Pure 100
Monopoly
Price Discrimination
Regulated Monopoly
75
D
Key Terms
50

Previous Next 25 MR = MC
Slide Slide MR
End
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24 - 21 Qm
Copyright McGraw-Hill/Irwin, 2005
 INEFFICIENCY OF PURE MONOPOLY
P An industry in pure competition S = MC
Four Market Models
sells where supply and
Monopoly Examples demand are equal
Barriers to Entry
The Natural At MR=MC
Monopoly Case
A monopolist
Monopoly Demand
will sell less
Monopoly Revenues
Pm
& Costs
units at a
Output & Price
Discrimination Pc higher price
Inefficiency of Pure
Monopoly than in
Price Discrimination competition
Regulated Monopoly
Key Terms

D
Previous Next
Slide Slide MR
End Q
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24 - 22
Qm Qc
Copyright McGraw-Hill/Irwin, 2005
 INEFFICIENCY OF PURE MONOPOLY
P S = MC
Four Market Models
Monopoly Examples
Barriers to Entry
The Natural At MR=MC
Monopoly Case
A monopolist
Monopoly Demand
will sell less
Monopoly Revenues
Pm Monopoly pricing effectively
& Costs
units at a
Output & Price
Discrimination Pccreates an income transfer from
higher price
Inefficiency of Pure
than in
Monopoly
Price Discrimination
buyers to the seller!
competition
Regulated Monopoly
Key Terms

D
Previous Next
Slide Slide MR
End Q
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24 - 23
Qm Qc
Copyright McGraw-Hill/Irwin, 2005
 COST COMPLICATIONS
Economies of Scale
Four Market Models
Monopoly Examples Simultaneous Consumption
Barriers to Entry
The Natural
Monopoly Case
Network Effects
Monopoly Demand
Monopoly Revenues
X-Inefficiency Inefficient internal
& Costs operation leads to
Output & Price
higher-than-
Average total costs

Discrimination
Inefficiency of Pure
Monopoly X necessary costs
Price Discrimination ATCx Average
Regulated Monopoly ATC1 X Total Costs
Key Terms ATCx

ATC2

Previous Next
Slide Slide
End
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24 - 24
Q1 Quantity Q2
Copyright McGraw-Hill/Irwin, 2005
 COST COMPLICATIONS
Economies of Scale
Four Market Models
Monopoly Examples Simultaneous Consumption
Barriers to Entry
The Natural
Monopoly Case
Network Effects
Monopoly Demand
Monopoly Revenues
X-Inefficiency
& Costs
Output & Price
Rent-Seeking Expenditures
Discrimination
Inefficiency of Pure
Monopoly
Rent-Seeking Behavior
Price Discrimination Technological Advance
Regulated Monopoly
Key Terms Assessment and Policy Options
Antitrust Action
Previous Next
Slide Slide Regulate Natural Monopoly
End
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24 - 25
Ignore it, if it is Short-Lived
Copyright McGraw-Hill/Irwin, 2005
 PRICE DISCRIMINATION
Four Market Models Conditions
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Monopoly Power
Monopoly Demand
Monopoly Revenues
& Costs
Market Segregation
Output & Price
Discrimination
Inefficiency of Pure
No Resale
Monopoly
Price Discrimination Consequences
Regulated Monopoly
Key Terms
More Profit
Previous
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Next
Slide More Production
End
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Graphically
Copyright McGraw-Hill/Irwin, 2005
 PRICE DISCRIMINATION
Four Market Models P Economic profits with MC
Monopoly Examples
Barriers to Entry a single MR=MC
The Natural
Monopoly Case
Price and Costs price
Monopoly Demand
Monopoly Revenues
ATC
& Costs
Output & Price
Discrimination
Inefficiency of Pure
Monopoly
Price Discrimination
Regulated Monopoly
Key Terms

Previous Next D
Slide Slide MR
End Q
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24 - 27
Q1
Copyright McGraw-Hill/Irwin, 2005
 PRICE DISCRIMINATION
A perfectly discriminating
P MC
Four Market Models monopolist has MR=D,
Monopoly Examples
Barriers to Entry
producing more product
The Natural
Monopoly Case
Price and Costs and more profit!
Monopoly Demand
Monopoly Revenues
ATC
& Costs
Output & Price
Discrimination
Inefficiency of Pure
Monopoly
Price Discrimination
Regulated Monopoly
Key Terms

MR=D
Previous
Slide
Next
Slide
D
End Q
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24 - 28
Q1 Q2
Copyright McGraw-Hill/Irwin, 2005
 PRICE DISCRIMINATION
Four Market Models P Economic profits with MC
Monopoly Examples
Barriers to Entry
price discrimination
The Natural
Monopoly Case
Price and Costs
Monopoly Demand
Monopoly Revenues
ATC
& Costs
Output & Price
Discrimination
Inefficiency of Pure
Monopoly
Price Discrimination
Regulated Monopoly
Key Terms

MR=D
Previous
Slide
Next
Slide
D
End Q
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24 - 29
Q1 Q2
Copyright McGraw-Hill/Irwin, 2005
 REGULATED MONOPOLY
Four Market Models
Natural Monopolies
Monopoly Examples
Barriers to Entry
The Natural
Monopoly Case
Rate Regulation
Monopoly Demand
Monopoly Revenues
& Costs
Socially Optimum Price
Output & Price
Discrimination
Inefficiency of Pure
P = MC
Monopoly
Price Discrimination
Regulated Monopoly
Fair-Return Price
Key Terms

P = ATC
Previous
Slide
Next
Slide
Dilemma of Regulation
End
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Graphically
Copyright McGraw-Hill/Irwin, 2005
 REGULATED MONOPOLY
Four Market Models P Monopoly Price
Monopoly Examples MR = MC
Barriers to Entry
The Natural Price and Costs
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs Pm
Output & Price
Discrimination
Inefficiency of Pure
Monopoly
Price Discrimination
ATC
Regulated Monopoly MC
Key Terms

D
Previous Next
Slide Slide MR
End
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24 - 31
Copyright McGraw-Hill/Irwin, 2005
 REGULATED MONOPOLY
Four Market Models P
Monopoly Examples
Barriers to Entry
The Natural
Fair-Return Price
Normal Profit Only
Price and Costs
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Inefficiency of Pure
Monopoly
Price Discrimination Pf ATC
Regulated Monopoly MC
Key Terms

D
Previous Next
Slide Slide MR
End
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24 - 32
Copyright McGraw-Hill/Irwin, 2005
 REGULATED MONOPOLY
Four Market Models P
Monopoly Examples
Barriers to Entry
The Natural Price and Costs
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Socially-Optimum
Output & Price
Discrimination
Price
Inefficiency of Pure P = MC
Monopoly
Price Discrimination
ATC
Regulated Monopoly
Pr MC
Key Terms

D
Previous Next
Slide Slide MR
End
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24 - 33
Copyright McGraw-Hill/Irwin, 2005
 REGULATED MONOPOLY
Four Market Models P Dilemma of Regulation
Monopoly Examples MR = MC Which Price?
Barriers to Entry
The Natural
Fair-Return Price
Price and Costs
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs Pm
Output & Price
Discrimination
Socially-Optimum
Inefficiency of Pure Price
Monopoly
Price Discrimination Pf ATC
Regulated Monopoly
Pr MC
Key Terms

D
Previous Next
Slide Slide MR
End
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24 - 34
Copyright McGraw-Hill/Irwin, 2005
 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

Monopolistic
Monopoly Case
Monopoly Demand
Monopoly Revenues
& Costs
Output & Price
Discrimination
Inefficiency of Pure
Monopoly
Competition
Price Discrimination
Regulated Monopoly
Key Terms
& Oligopoly
Previous Next
Slide Slide
End
Chapter 25
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24 - 36
Copyright McGraw-Hill/Irwin, 2005