Transcript E160.S10.W13.Monopoly

ECON 160
Week 13
Monopoly: Price Searcher
Chapter 15
$Price
Demand Facing the Firm
Demand
$10
9
8
7
6
5
4
3
2
1
D
1
2
3
4
5
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8
Qty/T
Total Revenue
$Price
Demand
$10
9
8
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5
4
3
2
1
D
1
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Qty/T
Marginal Revenue =Additional Revenue
$Price
Demand
$10
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2
1
D
1
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7
Qty/T
Marginal Revenue
$Price
Demand
D
MR
Qty/T
$Px
Marginal Revenue & Elasticity of Demand
$ 10
$ 9
$ 8
$ 7
$ 6
$ 5
$ 4
$ 3
$ 2
$ 1
Ed > 1
Ed = 1
Ed < 1
Demand x
1
2
3
4
5
6
7
8
9
10
Qtyx /T
Marginal Revenue
Monopoly Output
$Price
Demand
MC
Pm
Mc
D
MR
Qm
Qty/T
Market Power: No Close Substitutes
$Price
MC
Demand
Pm
Mc
D
MR
Qm
Qty/T
Market Power: Few Close Substitutes
$Price
MC
Demand
Pm
Mc
D
MR
Qm
Qty/T
Market Power: Many Close Substitutes
$Price
Demand
MC
Pm
D
Mc
MR
Qm
Qty/T
Price Taker: No Market Power: Many Identical
Substitutes
$Price
MC
Demand
P = MR
P = Mc
Qm
Qty/T
Monopoly Profit?
Demand
MC
Pm
AC
Profit
D
MR
Qm
Qty/T
Response to Profits
• New firms enter with similar products
• Demand declines and becomes more elastic
• Price falls, output falls and profits decline
Effect of Competition
$P
MC
D
AC
Pm
D
MR
Qm
Qty/T
Monopoly Efficiency Loss ?
$Price
Demand
MC
Pm
Pc?
D
MR
Qm
Qc?
Qty/T
Sources of Monopoly
• Natural Monopoly
• Patents
• Firm actions
– Legal harassment
– Exclusive licensing
– Bundling
Solutions
• Government Price regulation
• Enforcement of Anti-Trust Laws
• Price Discrimination
Price Discrimination
• Charging different prices for different units
sold.
• Allows firms to increase sales and capture
more of consumer surplus.
Monopoly Pricing: Single Price
$ Price
Demand
Pm
Marginal Cost
MR
Qm
Qty/T
First Degree: Charging different customers
different prices. (i.e. moving down the demand
curve)
• Auction
Monopoly Pricing: First Degree
$ Price
P1
P2
P3
P4
P5
P6
Demand
Marginal Cost
Q1 Q2 Q3 Q4 Q5 Q6
Qty/T
First Degree: Charging different customers
different prices. (i.e. moving down the demand
curve)
• Auction
• College scholarships
First Degree: Different Prices for different buyers
$ Price
Demand
Scholarship Amount
Tuition
Marginal Cost
MR
Qm
Qty/T
First Degree: Charging different customers
different prices. (i.e. moving down the demand
curve)
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Auction
College scholarships
IBM Punch Cards
Polaroid Camera & Film
Xerox copier & Toner
Ink Jet Printers & Cartridges
Razor handle & Blades
Swiffer handle & Pads
Glade Plugins & refills
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.
• Family Gym membership
• Product prices, (Drinks, coffee, cereal, toothpaste)
– medium16 oz. $ 1.09, .07/oz.
– large: 22 oz. $ 1.19, extra 6 oz. @ .02/oz.
– extra large:32 oz. $1.29, extra 10 oz. @ .01/ oz.
Third Degree: Charging different prices to
different groups according to different elasticity
of Demand.
Third Degree: Identify Sub-groups
A
Market
B
P
P
P
Pb
Pm
Pm
Pm
Da
Pa
MC
MR
Db
Qm
Qa
Q/t
Qb Qm
Q/t
Qm
D
Q/t
Third Degree: Charging different prices to different
groups according to different elasticity of Demand.
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Grocery coupons
Theaters
Airlines & Hotels
Newly released unique products (Segway)
Prescription drugs in different countries.
Brand name mixers (Holiday Sale)
Mattresses: Match any advertised price
Menu (Freeway)
Menu (Chinese)
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