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Understanding Monopoly Market Dynamics: Price, Demand & Revenue Analysis

This document delves into the intricacies of monopoly pricing, demand elasticity, and revenue models from Chapter 15 of our economic analysis series. It explores concepts such as marginal revenue, market power influenced by substitutes, and the implications of competition on monopoly profits. Furthermore, we examine various forms of price discrimination and the conditions necessary for successful implementation. Included are real-world examples of products that utilize these pricing strategies, illuminating their impact on consumer surplus and market dynamics.

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Understanding Monopoly Market Dynamics: Price, Demand & Revenue Analysis

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  1. Monopoly: Price Searcher Weeks 13-14 Chapter 15

  2. Demand Facing the Firm $Price Demand $10 9 8 7 6 5 4 3 2 1 D Qty/T 1 2 3 4 5 6 7 8

  3. Total Revenue $Price Demand $10 9 8 7 6 5 4 3 2 1 D Qty/T 1 2 3 4 5 6 7

  4. Marginal Revenue =Additional Revenue $Price Demand $10 9 8 7 6 5 4 3 2 1 D Qty/T 1 2 3 4 5 6 7

  5. Marginal Revenue $Price Demand D MR Qty/T

  6. Marginal Revenue & Elasticity $Price Ed > 1 Ed = 1 Ed < 1 Demand Qty/T MR

  7. Monopoly Output $Price Demand MC Pm Mc D MR Qm Qty/T

  8. Market Power: No Close Substitutes $Price MC Demand Pm Mc D MR Qty/T Qm

  9. Market Power: Few Close Substitutes $Price MC Demand Pm Mc D MR Qty/T Qm

  10. Market Power: Many Close Substitutes $Price MC Demand Pm D Mc MR Qty/T Qm

  11. Price Taker: No Market Power: Many Identical Substitutes $Price MC Demand P = MR P = Mc Qty/T Qm

  12. Monopoly Profit? Demand MC Pm Profit AC D MR Qm Qty/T

  13. Response to Profits • New firms enter with similar products • Demand declines and becomes more elastic • Price falls,output falls and profits decline

  14. Effect of Competition $P MC D AC Pm D MR Qm Qty/T

  15. Monopoly Efficiency Loss ? $Price Demand MC Efficiency Loss Pm Pc? D MR Qm Qty/T Qc?

  16. Sources of Monopoly • Natural Monopoly • Patents • Firm actions • Legal harassment • Exclusive licensing • Bundling

  17. Solutions • Government Price regulation • Enforcement of Anti-Trust Laws • Price Discrimination

  18. Price Discrimination • Charging different prices for different units sold. • Allows firms to increase sales and capture more of consumer surplus.

  19. First Degree: Charging different customers different prices. • Auction • College scholarships • IBM Punch Cards • Polariod Camera, Film • Ink Jet Printers, Cartridges • Swiffer, pads • Glllette Razor, Blades

  20. Second Degree: (Quantity Forcing) • Offering a schedule of prices to all buyers, which successively lowers the price for additional units, purchased (Moving down each buyers individual demand) • Tires: Buy 3, get 4th free. • Product prices, • medium16 oz. $ 1.09, .068125/oz. • large: 22 oz. $ 1.19, 6 oz. @ .0167/oz. • extra large:32 oz. $1.29, 10 oz. @ .01/ oz. • gulp: 44 oz. $ 1.49, 12 oz. @ .0167/ oz. • Toothpaste • Cereal • Coffee

  21. Third Degree: Identify Sub-groups Market A B P P P Pb Pm Pm Pm Da Pa MC MR D Db Qm Qa Q/t Qb Qm Q/t Qm Q/t

  22. Necessary Conditions for Successful Price Discrimination • Ability to identify and separate buyers by elasticity of demand. • Collect different prices from the different buyers • Prevent Resale

  23. Third Degree:Charging different prices to different groups according to different elasticity of Demand. • Grocery coupons • Prescription drugs in different countries. • Doctors medical services • Newly released unique products • Movies • Mail Order Catalogues • Freeway Adjacent Restaurant • Holiday Brand name mixers • Mattresses: Match any advertised price • Chinese Menu

  24. Economics of Advertising • Primary Economic Function: Lower Search and quality identification costs • Higher expenditure on Advertising tends to indicate higher quality • Branding is primarily a means of conveying a level of quality • Advertising can be used to create a characteristic in a product

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