Four Market Models

Monopoly Examples
Barriers to Entry
The Natural Monopoly
Case
Monopoly Demand
Monopoly Revenues &
Costs
Output & Price Discrim
11 CHAPTER Pure
Monopoly
ination
Inefficiency of Pure Mo
nopoly
Price Discrimination
Regulated Monopoly
Key Terms

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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
Monopoly Revenues &
Costs
Output & Price Discrim
• Price Maker
• Blocked Entry
ination
Inefficiency of Pure Mo
nopoly

• Nonprice Competition
Price Discrimination
Regulated Monopoly
Key Terms
Pure Monopolistic Pure
Competition Competition Oligopoly Monopoly

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End Market Structure Continuum
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 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 Discrim
ination Dual Objectives of the Study
• Monopoly as a Market
Inefficiency of Pure Mo
nopoly
Price Discrimination

Structure
Regulated Monopoly
Key Terms

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• To Better Understand
Other Market Structures
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End
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Copyright McGraw-Hill/Irwin, 2005
 BARRIERS TO ENTRY
Four Market Models
Economies of Scale
Monopoly Examples • The Natural Monopoly Case
• Minimum Efficient Scale
Barriers to Entry
The Natural Monopoly
Case
Monopoly Demand
Monopoly Revenues &
Costs
Legal Barriers to Entry
Output & Price Discrim
ination
• Patents
Inefficiency of Pure Mo
nopoly • Licenses
Ownership or Control of
Price Discrimination
Regulated Monopoly
Key Terms

Essential Resources
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Next
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Barriers to Entry
Copyright McGraw-Hill/Irwin, 2005
 THE NATURAL MONOPOLY CASE
Four Market Models
Monopoly Examples
Barriers to Entry
The Natural Monopoly
Average Total Cost
Case $20
Monopoly Demand
Monopoly Revenues &
Costs 15
ATC
Output & Price Discrim
ination
Inefficiency of Pure Mo
nopoly
10
Price Discrimination If ATC declines over extended
Regulated Monopoly
Key Terms
output, least-cost production is
realized only if there is one
Previous Next
producer - a natural monopoly.
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0 50 100 200
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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 Discrim
ination
Regulation
Inefficiency of Pure Mo
nopoly
Price Discrimination
• Firm Charges the Same
Regulated Monopoly
Key Terms
Price for all Units Sold
Market Demand Curve is the
Firm’s Demand Curve
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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 but revenue will
Case
Monopoly Demand
$142 Loss = $30 increase with the
Monopoly Revenues &
Costs
132 additional
Output & Price Discrim
ination unit sold.
Inefficiency of Pure Mo
nopoly
Price Discrimination
Regulated Monopoly D
Key Terms
Gain = $132

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End
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11 - 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 but revenue will
Case
Monopoly Demand
$142 Loss = $30 increase with the
Monopoly Revenues &
Costs
132 additional
Output & Price Discrim
ination unit sold.
Inefficiency of Pure Mo
nopoly
Price Discrimination
Regulated Monopoly Marginal Revenue D
$142 - $30 = $102
Key Terms
Gain = $132

Previous Next will necessarily be

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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 Discrim
ination
Inefficiency of Pure Mo
nopoly
Price Discrimination
Regulated Monopoly
Key Terms

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End
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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
] $162 ]
Monopoly Demand
Monopoly Revenues &
Costs 1 x 162 = 162 -
$190.00 190 = - 28
Output & Price Discrim
ination
Inefficiency of Pure Mo

MC = $190 – 100 = $90

nopoly
Price Discrimination
MR = $162 – 0 = $162
Regulated Monopoly
Key Terms
MR > MC
Loss Improvement
Previous Next from -$100 to -$28
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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 Discrim
2 152 304 135.00 270 70 + 34
ination
] 122 ]
Inefficiency of Pure Mo 3 142 426 113.33 340 + 86
nopoly ] 102 ] 60
4 132 528 100.00 400 + 128
] ] 70
Price Discrimination
82
Regulated Monopoly
5 122 610 94.00 470 + 140
Key Terms ] 62 ] 80
6 112 672 91.67 550 + 122
] 42 ] 90
7 102 714 91.43 640 + 74
Next ] 22 ] 110
Previous
8 92 736 93.73 750 - 14
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] 2 ] 130
9 82 738 97.78 880 - 142
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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 -

Can0 you
$172see
$ profit
The Natural Monopoly
Case
0 $100 90 - $100
Monopoly Demand
Monopoly Revenues &
maximization?
1 162 162
] $162 MR > ]= MC
$190.00 190 80 - 28
Costs
] 142 ]
Output & Price Discrim
2 152 304 135.00 270 70 + 34
ination
] 122 ]
Inefficiency of Pure Mo 3 142 426 113.33 340 60 + 86
nopoly ] 102 ]
4 132 528 100.00 400 70 + 128
] 82 ]
Price Discrimination
Regulated Monopoly
5 122 610 94.00 470 80 + 140
Key Terms ] 62 ]
6 112 672 91.67 550 90 + 122
] 42 ]
7 102 714 91.43 640 110 + 74
Next ] 22 ]
Previous
8 92 736 93.73 750 130 - 14
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] 2 ]
9 82 738 97.78 880 150 - 142
End
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11 - 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 Discrim
2 152 304 135.00 270 70 + 34
ination
] 122 ]
Inefficiency of Pure Mo 3 142 426 113.33 340 + 86
nopoly ] 102 ] 60
4 132 528 100.00 400 + 128
] ] 70
Price Discrimination
82
Regulated Monopoly
5 122 610 94.00 470 + 140
Key Terms ] 62 ] 80
6 112 672 91.67 550 + 122
] 42 ] 90
7 102 714 91.43 640 + 74
Next ] 22 ] 110
Previous
8 92 736 93.73 750 - 14
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] 2 ] 130
9 82 738 97.78 880 - 142
End
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 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 Discrim
ination
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
Inefficiency of Pure Mo
nopoly
Price Discrimination
$750
Regulated Monopoly
Dollars

Key Terms
500

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0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
11 - 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 Discrim
ination
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
Inefficiency of Pure Mo
nopoly
Price Discrimination
$750
Regulated Monopoly
Dollars

Key Terms
500

TR
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0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
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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 Discrim
ination
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
Inefficiency of Pure Mo
nopoly
Price Discrimination
$750
Regulated Monopoly
Dollars

Key Terms
500

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

Four Market Models Cost Data

Monopoly Examples
Barriers to Entry
The Natural Monopoly
MR = MC Rule
Case
Monopoly Demand No Monopoly Supply Curve
Monopoly Pricing
Monopoly Revenues &
Costs
Output & Price Discrim

Misconceptions
ination
Inefficiency of Pure Mo
nopoly
Price Discrimination
Regulated Monopoly
• Not Highest Price
Key Terms
• Total, Not Unit, Profit
Previous Next • Possibility of Losses
Graphically…
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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 Discrim 125
ination $122
Inefficiency of Pure Mo
nopoly 100 Profit ATC
Price Discrimination
$94
Regulated Monopoly
Key Terms
75
D
50

Previous Next 25 MR = MC
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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

h a t A b o u t MC
W
Costs
Output & Price Discrim
ination $122
125

i m i z a ti o n?
Inefficiency of Pure Mo
nopoly
Profit
$94Loss M
100 i n ATC
Price Discrimination
Regulated Monopoly
Key Terms
75
D
50

Previous Next 25 MR = MC
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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,
175 Per Unit
The Natural Monopoly
Case the firm will produce
Price, costs, and revenue

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

Previous Next 25 MR = MC
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End
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11 - 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
What are the MC
The Natural Monopoly 175
Case
Price, costs, and revenue

Monopoly Demand
150

Economic EffectsAVC
Monopoly Revenues &
Costs
A Loss ATC
Output & Price Discrim 125
ination Pm

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

Previous Next 25 MR = MC
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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 Monopoly
At MR=MC
Case
Monopoly Demand
A monopolist
will sell less
Monopoly Revenues &
Costs Pm
Output & Price Discrim
units at a
ination
Inefficiency of Pure Mo
Pc higher price
nopoly than in
Price Discrimination
competition.
Regulated Monopoly
Key Terms

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

D
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End
Q
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Qm Qc
Copyright McGraw-Hill/Irwin, 2005
 COST COMPLICATIONS
Economies of Scale
Simultaneous Consumption
Four Market Models
Monopoly Examples

Network Effects
Barriers to Entry
The Natural Monopoly
Case
Monopoly Demand
Monopoly Revenues &
X-Inefficiency Inefficient internal
Costs operation leads to
Output & Price Discrim
ination higher-than-
Average total costs

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

ATC2

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Q1 Quantity Q2
Copyright McGraw-Hill/Irwin, 2005
 COST COMPLICATIONS
Economies of Scale
Simultaneous Consumption
Four Market Models
Monopoly Examples

Network Effects
Barriers to Entry
The Natural Monopoly
Case
Monopoly Demand
Monopoly Revenues &
X-Inefficiency
Costs
Output & Price Discrim Rent-Seeking Expenditures
Rent-Seeking Behavior
ination
Inefficiency of Pure Mo
nopoly
Price Discrimination
Regulated Monopoly
Technological Advance
Key Terms Assessment and Policy Options
Antitrust Action
Regulate Natural Monopoly
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Ignore it, if it is Short-Lived
Copyright McGraw-Hill/Irwin, 2005
 PRICE DISCRIMINATION
Four Market Models Conditions
Monopoly Power
Monopoly Examples
Barriers to Entry
The Natural Monopoly
Case
Monopoly Demand
Monopoly Revenues &
Costs
Market Segregation
No Resale
Output & Price Discrim
ination
Inefficiency of Pure Mo

Consequences
nopoly
Price Discrimination
Regulated Monopoly
Key Terms
More Profit
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Graphically…
Copyright McGraw-Hill/Irwin, 2005
 PRICE DISCRIMINATION
Four Market Models P Economic profits with MC
a single MR=MC
Monopoly Examples
Barriers to Entry
The Natural Monopoly
Case
Price and Costs price
Monopoly Demand
Monopoly Revenues & ATC
Costs
Output & Price Discrim
ination
Inefficiency of Pure Mo
nopoly
Price Discrimination
Regulated Monopoly
Key Terms

Previous Next D
Slide Slide MR
End
Q
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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 Discrim
ination
Inefficiency of Pure Mo
nopoly
Price Discrimination
Regulated Monopoly
Key Terms

MR=D
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D
End
Q
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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 Discrim
ination
Inefficiency of Pure Mo
nopoly
Price Discrimination
Regulated Monopoly
Key Terms

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

Previous
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Next
Slide
Dilemma of Regulation
Graphically…
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 REGULATED MONOPOLY
Four Market Models P Monopoly Price
Monopoly Examples MR = MC
Barriers to Entry
The Natural Monopoly
Case
Price and Costs
Monopoly Demand
Monopoly Revenues &
Costs
Pm
Output & Price Discrim
ination
Inefficiency of Pure Mo
nopoly
Price Discrimination ATC
Regulated Monopoly
Key Terms
MC

D
Previous Next
Slide Slide MR
End
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11 - 31
Copyright McGraw-Hill/Irwin, 2005
 REGULATED MONOPOLY
Four Market Models P
Monopoly Examples
Barriers to Entry
The Natural Monopoly
Fair-Return Price
Case
Normal Profit Only
Price and Costs
Monopoly Demand
Monopoly Revenues &
Costs
Output & Price Discrim
ination
Inefficiency of Pure Mo
nopoly
Price Discrimination Pf ATC
Regulated Monopoly
Key Terms
MC

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

D
Previous Next
Slide Slide MR
End
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11 - 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 Monopoly
Case
Fair-Return Price
Price and Costs
Monopoly Demand
Monopoly Revenues &
Costs
Pm
Output & Price Discrim
ination
Socially-Optimum
Inefficiency of Pure Mo
nopoly
Price
Price Discrimination Pf ATC
Regulated Monopoly
Key Terms Pr MC

D
Previous Next
Slide Slide MR
End
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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 Monopoly

Monopolistic
Case
Monopoly Demand
Monopoly Revenues &
Costs

Competition
Output & Price Discrim
ination
Inefficiency of Pure Mo
nopoly

& Oligopoly
Price Discrimination
Regulated Monopoly
Key Terms

Previous Next

Chapter 12
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