Possible Barriers to Entry

1
a market served by a single firm
Possible Barriers to Entry
2
Possible Barriers to Entry (cont.)
3
Monopolists Marginal Revenue
Demand for New Drug Slope 0.01/dose
4
Monopolists Marginal Revenue
Slope 0.01/dose
Market Demand
Marginal Revenue
MR price (quantity x slope)
16 ( 800 x -0.01 )
5
Monopolists Output Decision
Monopoly price decreases with quantity
6
Profit for Different Output Decisions
Average cost
Market Demand
7
Profit for Different Output Decisions
Average cost
Market Demand
8
Profit for Different Output Decisions
Average cost
Market Demand
9
Monopolists Output Decision
Monopoly quantity price
Market Demand
Marginal cost
Marginal Revenue
10
Constant-Cost Industry
Monopoly quantity price
Market Demand
Perfect competition quantity price
Marginal Revenue
Average Cost Marginal Cost
11
Perfect Competition Constant-Cost Industry
Market Demand
Average Cost Marginal Cost
12
Monopoly Constant-Cost Industry
Market Demand
Deadweight loss from monopoly
Average Cost Marginal Cost
13
Monopoly with Price Discrimination
Market Demand
Deadweight loss
Average Cost Marginal Cost
14
Patents

• government-protected monopolies
• provide monopoly profits to a firm
• encourages RD and innovation

Natural Monopolies

• economies of scale for very large operations
• inefficient for two firms to provide service
• government often sets maximum price

15
Regulating the Natural Monopoly
ATC slopes downward large economies of scale
Demand
MR
Monopolist would choose a price to maximize
profit.
ATC
MC
16
Regulating the Natural Monopoly
Regulators will set a lower price
Demand
MR
that satisfies the monopolist and maximizes
total surplus
ATC
MC