ECON 308 Week 7 1 Monopoly Monopoly Pricing Chapter 7 Market structure What is a market All firms and individuals willing and able to buy or sell a particular product What is market structure Defined by attributes of the market environment Demand Facing the Firm P P D1 P D2 Q Q P D3 D4 Q Increasing degrees of Competition Increasing degrees of Market Power Q Market structure the archetypes Monopoly Oligopoly Monopolistic competition Perfect competition Perfect competition characteristics Many buyers and sellers Product homogeneity Low cost and accurate information Free entry and exit Best regarded as a benchmark Price Taker Firm Demand Curve P P Market D Firm S Pe Pe D MR S D Qe Q T Qe Q T Firm supply Short run Marginal cost curve above average variable cost P SRMC Long run Long run marginal cost curve above long run average cost Long Run Industry Equilibrium P P Market D Firm MC S ATC Pe Pe D S D Qe Q T Qe Q T Monopoly Strong barriers to entry single supplier Profit maximization faces market demand and sets MR MC Unexploited gains from trade Sources of Market Power Barriers to entry Incumbent reactions Incumbent advantages Precommitment contracts Licenses and patents Learning curve effects Pioneering brand advantages Specific assets Economies of scale Excess capacity Reputation effects Price Demand Facing the Firm Demand 10 9 8 7 6 5 4 3 2 1 D 1 2 3 4 5 6 7 8 Qty T Total Revenue Price Demand 10 9 8 7 6 5 4 3 2 1 D 1 2 3 4 5 6 7 Qty T Marginal Revenue Additional Revenue Price Demand 10 9 8 7 6 5 4 3 2 1 D 1 2 3 4 5 6 7 Qty T Derivation of Marginal Revenue Price Quantity Total Revenue Marginal Revenue 10 00 9 00 8 00 7 00 6 00 5 00 4 00 3 00 2 00 1 2 3 4 5 6 7 8 9 10 00 18 00 24 00 28 00 30 00 30 00 28 00 24 00 18 00 8 00 6 00 4 00 2 00 0 2 00 4 00 6 00 Marginal Revenue Price Demand D MR Qty T Marginal Revenue Elasticity Price Ed 1 Ed 1 Ed 1 MR Demand Qty T Monopoly Output Price Demand MC Pm Mc D MR Qm Qty T Market Power No Close Substitutes Price MC Demand Pm Mc MR Qm D 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 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 Monopoly After Entry of Competition Price Demand MC AC Pm D MR Qm Qty T Efficiency Loss Demand MC Pm Mc MR Qm D Qty T Sources of Monopoly Power Barriers to Entry Absolute Cost Advantage Unique access to production technique or an essential input Natural Monopoly Economies of Scale Product differentiation Regulatory Barriers Patents copyrights franchise license 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 Potential Efficiency loss Marginal Cost MR Qm Qty T First Degree Charging different customers different prices Auction College scholarships First Degree Degree Different Prices for different buyers Price Demand Scholarship Amount Tuition Marginal Cost MR Qm Qty T First Degree Charging different customers different prices 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 Soft Drinks Product prices 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 Two Part Tariff Entry Fee plus per unit Costco Membership Price Third Degree Charging different prices to different groups according to different elasticity of Demand Grocery coupons Prescription drugs in different countries Doctors medical services Newly released unique products Movies Children Seniors Middle Matinee Mail Order Catalogues Old vs New Customer Freeway Adjacent Restaurant Brand name mixers on Holiday Sale Mattresses Match any advertised price Menu 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