Monopoly (continued)Monopoly: Profit Maximization by the NumbersP Q TR MR TC MC Profit90 10 900 --- 1000 --- -100(fixed costs are toblame)80 20 1600 70 1200 20 +40070 30 2100 50 1500 30 +60060 40 2400 30 1900 40 +50050 50 2500 10 2400 50 +100MC = Difference in TC divided by Difference in QProfit = TR - TCSomewhere 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.Social Costs of Monopoly (Why is monopoly a market failure?)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 thedemand curveMarginal 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. BenefitIS 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 NOTsocially optimal.They are getting away with charging P*, because they are deliberately limiting production, they use demand curve and extract a higher price which maximizestheir profit.Total Surplus: Consumer: Price people pay and go up to the demand curve Producer: from cost up till P* Deadweight loss: Underneath demand, aboveMarginal 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.Price DiscriminationWe normally view discrimination as bad. In the situation of a monopoly, this might actually be an improvement• Price Discrimination:• charging diff prices to diff customers even though the costs of producing are the same.• How?• You can’t charge diff people diff prices UNLESS you have MARKET POWER• 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 topay— I’d charge diff amounts)• Prevent arbitrage- take advantage of price differences- buy low, sell highSqueezing 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 PAYPrice Discrimination Examples• 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—Prevent arbitrage by selling 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 Lessons• Increases monopolist’s profits• Total Surplus Increases• Reduces
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