Monopoly continued Monopoly Profit Maximization by the Numbers P 90 80 70 60 50 Q 10 20 30 40 50 TR 900 1600 2100 2400 2500 MR 70 50 30 10 TC 1000 1200 1500 1900 2400 MC 20 30 40 50 fixed costs are to Profit 100 blame 400 600 500 100 MC Difference in TC divided by Difference in Q Profit TR TC Somewhere between 30 and 40 we should stop producing Profit Maximizing If we focus on the margin we continue to produce as long as the last one brings in more than it costs to make Demand curve represents the marginal benefit to consumers society as we go further to the right the marginal benefit of the last one consumed is on the Social Costs of Monopoly Why is monopoly a market failure demand curve Marginal cost is measure by supply curve Marginal benefit marginal revenue matches marginal cost at equilibrium Self interest will guide it to produce at a location and price that is anything but socially optimal Socially optimal quantity is where benefit and cost match Benefit IS the demand curve Socially optimal where MR crosses Demand This graph tells us a monopoly is not socially optimal because they produce at a quantity and price that is NOT They are getting away with charging P because they are deliberately limiting production they use demand curve and extract a higher price which maximizes Total Surplus Consumer Price people pay and go up to the demand curve Producer from cost up till P Deadweight loss Underneath demand above socially optimal their profit Marginal cost over to Q Deadweight loss measures inefficiency When all is said and done the monopolist is not socially optimal They produce less to gain a higher producer surplus We normally view discrimination as bad In the situation of a monopoly this might actually be an improvement charging diff prices to diff customers even though the costs of producing are the same Price Discrimination Price Discrimination How cid 127 cid 127 cid 127 Differentiate consumer preference Clickers I manufacture clickers and I m the only one If i was able to determine how much each group was willing to You can t charge diff people diff prices UNLESS you have MARKET POWER pay I d charge diff amounts Prevent arbitrage take advantage of price differences buy low sell high Squeezing as much producer surplus as each price and quantity Rather than charge everyone 30 they capture the willingness of each group by charging different prices How do I found Perfect Price Discrimination charge EACH CONSUMER exactly what they would PAY Best Seller Books fans will pay more wanna be first willing to pay any price less enthused people willing to wait rerelease the book for less year later Airline Tickets Business will pay any price Leisure will stay over the weekend to avoid price0 Discount Coupons Financial Aid High tuition and then use financial aid Price Discrimination Examples Prevent arbitrage by selling later Price Discrimination Lessons Increases monopolist s profits Total Surplus Increases Reduces Inefficiency cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127
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