Transcript Monopoly: Price Searcher

Monopoly: Price Searcher
Week 8
Chapter 15
$Price
Demand Facing the Firm
Demand
$10
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D
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Qty/T
Total Revenue
$Price
Demand
$10
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Qty/T
Marginal Revenue =Additional Revenue
$Price
Demand
$10
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Qty/T
Marginal Revenue
$Price
Demand
D
MR
Qty/T
Marginal Revenue & Elasticity
$Price
Ed > 1
Ed = 1
Ed < 1
Demand
Qty/T
MR
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
Efficiency Loss
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.
First Degree: Charging different
customers different prices.
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Auction
College scholarships
IBM Punch Cards
Polariod Camera, Film
Ink Jet Printers, Cartridges
Swiffer, pads
Glllette Razor, Blades
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
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
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
Third Degree: Charging different prices to different
groups according to different elasticity of Demand.
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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
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