MCATCMCATCMRDECON160 Spring 2010 Week 13 April 20-22, 2010 Classnotes : Monopoly = Price Searcher (Chapter 15)1. All firms that are not in perfectly competitive markets face a downward sloping demand curve. We can then use the (monopoly model = Price Searcher) to represent the pricing behavior and production decision of all other firms.2. If demand is downward sloping, marginal revenue is less then Price.Demand Total Revenue Marginal RevenuePrice Qty$10 1 $ 10 $10$ 9 2 $ 18 $ 8$ 8 3 $ 24 $ 6$ 7 4 $ 28 $ 4$ 6 5 $ 30 $ 2The marginal revenue (addition to revenue from selling one more unit) is less than price, because to sell more, you must lower the price to all buyers.3. The degree of competition facing the firm is reflected by the elasticity of demand. With fewer competitors the demand is more inelastic (steeper), with more competitors it is more elastic (flatter)4. The monopoly model: downward sloping demand curve5. The profit maximizing output is where MR = MC, just like for the price taker firm.6. The Price is above MR, and therefore, the price is above marginal cost (MC).7. The ratio of price to marginal cost is a measure of the market power of the firm. (i.e. the fewer the competitors, the greater the ratio)$PriceQty / TimeDemandMarginal RevenuePmQmMarginal CostMC8. Monopoly Profits ?$ Price9. Monopoly profits only occur if TR( Pm x Qm) is greater than TC (AC x Qm) There is nothing in being a monopoly that guarantees profits. A. The existence of profits will stimulate resource owners to produce similar products. B. As more close substitutes enter the market, the demand facing the monopoly will decline and become more elastic. This means competition will bring lower prices and lower profits. Thereare no profits in the long run, UNLESS the firm can limit competition. C. Monopoly after competition from similar products.$ Price10. Efficiency ( Dead-Weight) Loss from reduced output ?Qty / TimeDemandMarginal RevenuePmQmMCATCAC$ ProfitQty / TimeDemandMRPmQmMCATC$Price Marginal CostThe monopolist produces at Qm so the units from Qm to Qc are not produced. Since these units have a marginal cost of production that is less than the marginal value to buyers, there is a potential efficiency loss of the shaded area. (MV – MC)11.Solutions:A. Government Price regulation (set price equal to average cost.)B. Enforcement of Anti-Trust Laws: Prohibits the most egregious anti-competitive actsC. Price Discrimination (Multiple Price Policies)Since many firms use multi-part pricing the efficiency loss is most often overstated. If firms can charge different prices for different units sold, they may be able to increase output to the social optimum of Qc. 1. First Degree: Charging different customers different prices. (i.e. moving down the demand curve)a. Auctionb. College scholarships2. 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)a. Buy 3, get 4th free.b. Product prices, medium16 oz. $ 1.09, .068125/oz. large: 22 oz. $ 1.19, 6 oz. @ .0167/oz. extra large:32 oz. $1.29, 10 oz. @ .01/ oz. gulp: 44 oz. $ 1.49, 12 oz. @ .0167/ oz.3. Third Degree: Charging different prices to different groups according to different elasticity of Demand. a. Grocery couponsb. Prescription drugs in different countries.c. Doctors medical Servicesd. Newly Released unique products4. Requires certain necessary conditions.a. Ability to identify and separate buyers by elasticity of demand.b. Collect different prices from the different buyersc. Prevent ResaleQty / TimeDMRPmQm
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