Transcript Lecture 3

Lecture 3
Monopoly and
Pricing with Market Power
Why are some markets
• Cost advantages of one firm over many
-control of key input
-use of superior technology or production
• Government created
-essential services
Single producer
“Price setter”: faces market demand curve
No entry: positive profits
Choose output such that MR(Q) = MC(Q)
P > MC(Q)
No supply curve
Monopoly vs. Perfect Competition
• Welfare in monopoly is lower than in case of
perfect competition
• Consumer surplus and producer surplus are lost
in monopoly because less than the competitive
output is produced
• There is a deadweight loss in monopoly
because of the difference between price and
marginal cost—consumers willing to pay more
for last unit of output than it cost to produce it
Pricing with Market Power
• Firms with market power can use different
pricing strategies to maximize their profits
• Use information about demand elasticities
to determine the profit maximizing markup
to use
Price discrimination
• 1st-degree
-sell each unit at the maximum price
consumers are willing to pay
• 2nd-degree
-post a schedule of declining prices for
different rangesof quantity
• 3rd-degree
-charge different prices to different groups of
Other pricing strategies:
• Bundling
-package related goods for sale together
• 2-part tariff
-charge a lump-sum fee for right to buy, plus
a per-unit charge for each unit