What is Monopoly? Market Power and Price Discrimination
1.
2. What is Monopoly?
It is a market system in which one firm
makes up the whole market.
Pure monopoly = single firm produces a
commodity or service for which there is no
close substitute (no other firms producing
the same product/s varying only in minor
ways from that of the monopolist)
7. Marginal revenue is less than market
price
For products with large fixed cost,
marginal cost is lower than the average
cost and vice versa
industry demand curve is negatively
slope
8.
9. Short Run Equilibrium
1. At what point would I be losing?
2. At what point would I break - even?
3. At what point would I maximize profit?
10. Rules for Monopoly
MR > MC = monopolist earns profit by
increasing output
MR < MC = monopolist earns by
decreasing output
MC = MR = monopolist is maximizing
profit
11. Short run Profit Minimization : Total Curves
400
300
200
100
0
-100
-200
Total Profit
Total Cost
Total Revenue
12. Short run Profit Minimization Per Unit Curves
160
140
MR
120
Demand of Price
100 AC
MC
80
60
40
20
0
-20
15. Less Than the Most Efficient
Size of the Plant
the monopolist market is limited that the
marginal revenue curve cuts the long run
average cost curve (LAC)
16.
17. B. Most Efficient Size of the
Plant
monopolist market and cost curves are
such that the marginal revenue curve hits
the minimum point of the long run
average curve (LAC)
18.
19.
20.
21. What is price discrimination?
The practice of charging different prices
for essentially the same good or service
Why discriminate price?
1. Monopolist can keep the markets apart
2. For it to be effective and profitable
22. Conditions Necessary for
Price Discrimination
The firm must have some degree of monopoly
power — it must be a price setter.
the market must be capable of being fairly
easily segmented—separated so that
customers with different elasticities of demand
can be identified and treated differently.
The various market segments must be isolated
in some way from one another to prevent
customers who are offered a lower price from
selling to customers who are charged a higher
price.
23. Examples of Price
Discrimination
Senior citizens and students are often offered
discount fares on city buses and trains.
Children receive discount prices for movie
theater tickets and entrance fees at zoos and
theme parks.
Faculty and staff at colleges and universities
might receive discounts at the campus
bookstore/cafeteria.
Physicians might charge wealthy patients more
than poor ones.
24. Types of Price Discrimination
First
Degree
price varies
by
customer's
willingness
or ability to
pay
25. Second Degree
price varies
according to
quantity sold
26. Third Degree
price varies by attributes such as location or by
customer segment, or in the most extreme
case, by the individual customer's identity; where
the attribute in question is used as a proxy for
ability/willingness to pay.
27.
28. How Price Discrimination
Affects Output?
How many manuscript should Carla edit?
Student Reservation Price
A $40
B 38
C 36
D 34
E 32
F 30
G 28
H 26
29. Students Reservation Total Revenue Marginal
Price Revenue
A $40 40 40
B 38 76 36
C 36 108 32
D 34 136 28
E 32 160 24
F 30 180 20
G 28 196 16
H 26 208 12
30. If Carla can price – discriminate, how
many papers should she edit?
Student Reservation Price
A $40
B 38
C 36
D 34
E 32
F 30
G 28
H 26
31. Perfectly discriminating monopolist
a firm that charges each buyer exactly his
or her reservation price
Hurdle Method of Discriminating
the practice by which seller offers a
discount to all buyers who overcome some
obstacle
Perfect Hurdle
a threshold that completely segregates
buyers
32. Price Discrimination with Perfect Hurdle
Students Reservation Total Revenue Marginal
Price Revenue
List Price Submarket
A $40 40 40
B 38 76 36
C 36 108 32
Discount Price Submarket
D 34 34 34
E 32 64 30
F 30 90 26
G 28 112 22
H 26 130 18
35. ADVANTAGES TO THE FIRM
Enables producers to gain a higher level
of revenue
Enables producers to produce more and
gain from economies of scale.
Profits gained in inelastic market segment
can be used to drive away competition in
more elastic market segment
36. ADVANTAGES TO THE
CONSUMERS
Poorer consumers may be able to consume
products.
Allows people to purchase a product at a lower
price than they would have had to pay if the
producer had not been able to secure higher
prices from others.
Increased output provides opportunity for more
consumers to use the product.
Economies of scale: If total output increases
significantly, this may result in lower average
cost and thus lower prices for consumers.
37. DISADVANTAGES OF PRICE
DISCRIMINATION
Any consumer surplus that existed before
the price discrimination will be lost.
Some consumers will pay more than the
price that would have been charged in a
single, non discriminated market.
If a firm succeeds in driving rival firms out
from the market, it can use its increased
monopoly power to increase prices and
exploit the consumers.