Monopoly - James Murray · Market Power Short-run Production Decisions Price Discrimination...

Market PowerShort-run Production Decisions

Price Discrimination

Monopoly

Econ 102: Introduction to Microeconomics

Econ 102: Introduction to Microeconomics Monopoly

Price DiscriminationGoals of today’s class

Goals of today’s class 2/ 19

Learn how monopolies maintain market power.

Learn how monopolies make production decisions.

Learn how monopolies can increase profits with pricediscrimination.

Characteristics of a MonopolyLegal BarriersMinimum Efficiency ScaleOther Barriers

Characteristics of a Monopoly 3/ 19

Single firm produces and sells to the entire market.

No close substitutes for the good.

Barriers to entry prevent new firms in long run.

All these enable firm to have market power, the ability of afirm to control the price of its product.

Barriers to Entry 4/ 19

Legal barriers to entry.

Minimum efficiency scale.

Networking externalities.

QWERTY monopolies.

Legal Barriers to Entry 5/ 19

Public franchise: government granted exclusive right to supplya service.

Examples: U.S. Postal Service, Major League Baseball.

Patents: exclusive right granted to inventors to produce andsell product for 20 years.

Copyright: exclusive right to distribute intellectual property.

Minimum Efficiency Scale 6/ 19

When the minimum of thelong-run average totalcost results in aproduction level thatserves the entire market.

QMES and PMES are thelong-run quantity andprice of a product from aperfectly competitiveindustry.

QMKT is the quantitydemanded from the entiremarket when the price isPMES .

Minimum efficiency scale barrier is often referred to as a“natural monopoly”.

Examples:

Electric utilities, cable company, phone company.

Examples have substantial fixed costs, causing large quantityto reach minimize average total cost.

Examples:

Networking Externalities 8/ 19

Sometimes buying/using a product is more beneficial whenother people also use it.

Externality: very generally, it is the situation when aneconomic transaction effects others not involved in thetransaction.

Network externality: when you have benefits from otherpeople using the same product.

Examples:

Microsoft office.Facebook and MySpace vs. Friendster or FaceSpace.

Examples:

QWERTY Effect 9/ 19

I made this term up. Anothergood term would be habitformation.

Does anyone know whykeyboard letters are arrangedthey way they are?

Why do we keep usinginferior technology?

Anyone ever heard of Dvorakkeyboard, invented in 1936 byEducational PsychologyProfessor August Dvorak?

QWERTY Effect 9/ 19

QWERTY

Dvorak

Marginal RevenueProfit Maximization

Demand and Marginal Revenue 10/ 19

The market demand curve is the demand curve facing themonopolist.

Marginal revenue does not equal price.

When you produce and sell an extra unit, move right and downalong the demand curve.This causes price (for entire quantity produced) to decrease.Change in total revenue is therefore less than the price.

Example Demand Curve 11/ 19

Compute the Total Revenue and Marginal Revenue for this lineardemand curve:

Price Quantity Total Revenue Marginal Revenue20 016 112 28 34 40 5

1 Graph the Demand Curve and Marginal Revenue Curve.

2 How are the slopes related?

Example Demand Curve 11/ 19

Compute the Total Revenue and Marginal Revenue for this lineardemand curve:

Price Quantity Total Revenue Marginal Revenue20 016 112 28 34 40 5

1 Graph the Demand Curve and Marginal Revenue Curve.

2 How are the slopes related?

Marginal Revenue and Elasticity 12/ 19

If you increase quantity(decrease price), and totalrevenue goes up, is thedemand elastic orinelastic?

Marginal Revenue ispositive for quantities lessthan midpoint.

Marginal Revenue isnegative for quantitiesgreater than midpoint.

Since MC is alwayspositive, output is alwayson elastic part of demandcurve.Econ 102: Introduction to Microeconomics Monopoly

Profit Maximization 13/ 19

Monopolist sets MR=MC.

Price is above marginalcost.

Economists call thedifference P - MC amark-up.

Price is above averagetotal cost.

Profits, Revenue, and Costs 14/ 19

Total Revenue is P x Q.

Total Cost is ATC x Q.

Profit is difference.

What happens in the longrun?

Comparison With Perfect Competition 15/ 19

ATC is greater thanminimum average totalcost.

Price is greater inmonopoly than underperfect competition.

Consumers pay pricegreater than average costof producing product.

How to DiscriminateGraphical IllustrationPerfect Price Discrimination

Price Discrimination 16/ 19

Price Discrimination: practice of charging different groupsof people different prices, based on their willingness and abilityto pay.

Examples:

Airlines charge business travelers more than leisure travelers.Many stores offer student discounts and senior discounts.Used car sales.

Requirements:

Identify and separate different types of buyers.Prevent resale of the product between buyers of different types.

Examples:

Requirements:

Examples:

Requirements:

Examples:

Requirements:

Examples:

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Examples:

Requirements:

Examples:

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Graphical Illustration 17/ 19

Single Price Monopolist Maximizing Profits.

Charging a higher price to buyers with greater ability andwillingness to pay.

Charging a lower price to buyers with lesser ability andwillingness to pay.

Doing both!

Perfect Price Discrimination 18/ 19

Perfect Price Discrimination: when a monopolist canidentify every single buyer’s willingness to pay and chargethem that amount.

What impact will this have on producer surplus and consumersurplus.

No “perfect” examples of perfect price discrimination.

Some attempts:

Car sales people.Viterbo tuition?

Some attempts:

Monopoly - James Murray · Market Power Short-run Production Decisions Price Discrimination...

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