Transcript Today - people.vcu.edu

Today
• Entry & the monopolist
• Price discrimination & the monopolist
Entry and the Monopolist
Why don’t others enter?
Barriers to Entry
• Ordinarily, we expect that profits will attract
entry to a market.
• This might make it hard to remain a
monopolist.
• Expect to see a monopoly only when there
are some kind of barriers to entry.
• We will discuss four types of barriers to
entry.
1. Economies of scale & natural
monopoly
P
If another firm produced less
than 10,000 units, it would
have higher AC and could be
undercut in price.
MC
p*
LRATC If it entered producing
10,000 units, then price
would be driven down below
AC for both firms.
D
20,000
13,000
10,000
9,000
Q
Natural Monopoly
• Demand is low enough that there is only
room for one firm producing at minimum
average cost.
• OR Economies of scale are so strong that
LRAC are decreasing up to a very large
quantity (relative to demand).
• Public utilities are often natural monopolies.
Regulation of Natural Monopoly
• Governments often create a legal monopoly
to provide goods that are natural
monopolies.
• This makes it illegal to compete against the
provider.
• Governments then regulate the monopoly to
force it to act more like a price taker.
• Many public utilities are regulated.
2. Large Set-up Costs
• Referring to large sunk costs of entry.
• Includes developing product, advertising,
setting up operations.
• Potential entrants may be reluctant to bear
these costs if they are not sure they will be
able to break even.
• Examples:
• Virgin cola; wide-body airplane production
3. Patent Laws or Trade Secrets
• It may be illegal or impossible to duplicate
the product.
• Secret formula for Coke
• spiral ham-cutting machine
• Polaroid cameras
Social Cost/Benefits of Patents
• Costs: Creates a monopoly, which harms
consumers.
• Benefits: Provides an incentive to do R&D
so as to earn monopoly profits for a while.
Otherwise, maybe no innovation.
• They are crudely balanced by giving patents
for 17 years only.
4. Legal Barriers
• Perhaps a legal monopoly (see regulation of
natural monopolies, above).
• Licensing requirements, such as in medicine
or law.
Price Discrimination and the
Monopolist
Type 2 Price Discrimination
• When a seller approximates selling the units
of a good for what they are worth to
consumers.
• The ice cream problem, when you set up
quantity discounts.
Profit Maximization and Price
Discrimination
• The profit-maximizing rule (choose Q
where MR = MC) applies only to “one
price” situations.
• If a monopolist is able to price discriminate,
this will allow him to do better.
Price Discrimination on Graph
P
MC
MR
If the monopolist
must charge only
one price, what
will he do?
D
Q
Price Discrimination on Graph
P
MC
How much is his
Producer’s
Surplus?
PM
MR
QM
D
Q
Price Discrimination on Graph
P
MC
PM
MR
QM
Can he increase
it by offering
different prices
on different
units?
D
Q
Price Discrimination on Graph
P
MC
How are
consumers
affected by this?
PM
MR
QM
D
Q
Type 3 Price Discrimination
• When different types of consumers have
different price elasticities of demand, a
seller can try to charge different prices
depending on who buys.
• Must have a way of identifying the highvalue consumers from the others.
• Must be able to prevent re-sale.
Example: Air Travel
• Business v. leisure travelers
• Who has more elastic demand?
• How can the types be identified?
• How is re-sale prevented?
Example: Movie ticket prices
• Matinee v. evening viewers
• Adult v. kid
• Who has more elastic demand?
• How can the types be identified?
• How is re-sale prevented?
Type 1 Price Discrimination
• When a seller sells each unit of a good for
what it is worth to each consumers.
• Called perfect price discrimination.
• In this situation, the monopolist does
provide the allocatively efficient level of
output.
Perfect Price Discrimination
Each unit sells for a
different price.
P
MC
The efficient quantity
is provided. Sum of PS
& CS is maximized
(but CS = 0).
PM
No deadweight loss.
MR
QM QE
D
Q
Coming Up
• Monopolistic competition & oligopoly
• Group Work: Exercise related to
monopolies
Instructions
• For each product or market, identify a way
that price discrimination is used.
• Which type (I, II, or III) is it?
• Are any devices needed to prevent re-sale or
separate types of consumers?
Products or Markets
• King’s Dominion (and other amusement
•
•
•
•
parks). Think beyond adult v. child ticket
prices.
Hotel rooms in Florida
Flea markets
Legal and medical services
Cheerios cereal