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Monopoly

Monopoly. Chapter 10. Monopoly Profit and Loss . In a PC market, each buyer is charged the same price for every unit: Homogenious product Full knowledge If firms charged different prices, no one would buy the product. 10.3 Price Discrimination.

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Monopoly

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  1. Monopoly Chapter 10

  2. Monopoly Profit and Loss • In a PC market, each buyer is charged the same price for every unit: • Homogenious product • Full knowledge • If firms charged different prices, no one would buy the product

  3. 10.3 Price Discrimination Under certain conditions, a firm with market power is able to charge different customers different prices. This is called price discrimination.

  4. Price Discrimination A negatively sloped demand curve means that buyers are willing to pay different prices for different amounts of the same product

  5. The Price-Discriminating Monopolist* • In order to price discriminate, a monopolist must be able to: • Negatively sloping demand slope • Identify groups of customers who have different elasticities of demand; • Separate them in some way; and • Limit their ability to resell its product between groups.

  6. The Price-Discriminating Monopolist • A price-discriminating monopolist can increase both output and profit. • It can charge customers with more inelastic demands a higher price. • It can charge customers with more elastic demands a lower price.

  7. The Price-Discriminating Monopolist • A price-discriminating monopolist can increase both output and profit. • Will charge every price above and until: MR = MC • eg. In slide 33, the firm would charge $36 for 0 , $33 for 1, $30 for 2, $27 for 3 ,$24 for 4

  8. Perfect Price Discrimination • By discriminating, a monopoly firm makes greater profits than it would make by charging both groups the same price. • A firm with market power could collect the entire consumer surplus if it could charge each customer exactly the price that that customer was willing and able to pay. This is called perfect price discrimination.

  9. Perfect Price Discrimination With perfect price discrimination the firm will produce at the perfectly competitive output where, P = MC Revenue is $21x7 = $147 P MC D at Qprofit max P = $24 PD = $21 PD = MC MC = MR D MR Q 7 4

  10. Early Bird Specials—Restaurants charge special, lower prices for early diners. Matinees—Theaters charge less for earlier shows. Air Fares—Airlines charge less for flyers willing to fly “off peak,” i.e. early morning and late night. The Early Bird Gets a Lower Price

  11. 10.4Social Evaluation of Monopoly • In some cases a monopoly may be considered illegal if they act against the public interest • Let’s run an experiment: • A Monopolist buys all the firms in a perfectly competitve market • As a result the monopolist faces a PC industry demand and supply curve...

  12. Supply Curve for the PC Industry Industry (10 firms) Single Firm P P MC1 Di Si = SUM of MC 10 firms in industry AVC1 Pe P1 = D = MR 21 2.1 Q Q

  13. D MR Monopolist Price and Quantity Effects Single Monoply Firm Industry (10 firms) P P S = MC Di Si = SUM of MC 10 firms in industry Pm Ppc=MRPC BPC MCM AMon 1.1 21 2.1 Q Q

  14. Monopoly and Allocative Efficiency • Compared to the PC firm, the monopolist produces less (1.1) and charges more (PM) See point “A” where, for the Monopolist MR=MC • At point “B” the PC firm maxes profit where MR=MC for the PC firm. So QPC= 2.1 and price = PPC

  15. Monopoly and Allocative Efficiency • At point “B” the PC firm maxes profit where MR=MC • Remember, for a PC firm MR=P so, the firm maxes profit at P=MC • If MR > MC then the PC firm will increase production until MR(=P)=MC • The PC ALWAYS produces at the SOCIALLY OPTIMAL point! • But, the monopolist produces at P > MC

  16. Monopoly and Allocative Efficiency • But, the monopolist produces at P > MC see point “A” • Compared to the PC firm, QMON < QPC • THE MONOPOLIST FIRM DOES NOT PRODUCE (Q) AT THE SOCIALLY OPTIMAL POINT!! • This is an example of: Allocative INEFFICIENCY

  17. Monopoly and Allocative Efficiency • But, the monopolist produces at P > MC see point “A” • Compared to the PC firm, QMON < QPC • THE MONOPOLIST FIRM DOES NOT PRODUCE (Q) AT THE SOCIALLY OPTIMAL POINT!! • This is an example of: Allocative INEFFICIENCY

  18. Monopoly and Productive Efficiency • The PC firm has to, in the long run, produce at MIN AVC to stay in business. • This is the point at which the competiton has driven the price down (undercut each other) until price sold = price to produce ie If, Profit = TRev > TCost Then, in a PC market ZERO Profit = TR = TC The Monopolist doesn’t have to worry about efficiency because there is no competition! It can set price ABOVE MC where Profit = TRev > TCost ALWAYS

  19. Monopoly and Economies of Scale • Should every monoply be outlawed?? Ah, no. eg: Microsoft Microsoft enjoys a monopoly. However, because it is so large it enjoys productive effiicency ie. The cost of producing Windows OS is small because costs are spread amoung so many people. These lower costs are passed on to the consumer. If there were only 4 programmers who can programme the OS they can chage more for their services if 400 programmers had that skill

  20. 10.5 Regulation of a Monopoly • A Natural Monopoly is a firm that first takes advantage of economies of scale (big size) which allow it to operate at low costs • It’s MC is pretty much constant ie. horizontal to x-axis ie. perfectly elastic • Let’s see how this looks... Pm

  21. D D,P MR MR Monopolist Price and Quantity Effects Regulation of a Single Monoply Firm Single Monoply Firm P P MC MC A C Pm PAC ATC B P,D,MRPC MCM A QPC = 2.1 QM=1.1 QM Q Q QAC 1.9 (Government Regulated)

  22. The Regulation of a Monopoly • It’s MC is pretty much constant ie. horizontal to x-axis ie. perfectly elastic but still produces at point “A” where: MC=MR and production = QM Not productively or allocatively efficient • Through regulation, the government can force the monopolist to produce at the socially optimal point, “B” where: P = MC and production = QPC

  23. The Regulation of a Monopoly • Through regulation, the government will force the monopolist to produce at the socially optimal point, “B” where: P = MC and production = QPC Productively and allocatively efficient • BUT, the government can’t force the monopolist to produce at point “B” because at this point in the long run the firm would have to shut down. • They allow a FAIR RETURN to exist at point “C” through Average Cost Pricing Not productively or allocatively efficient

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