Krug N14b

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Krug N14b

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

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