10-1 copyright 2007 mcgraw-hill australia pty ltd ppts t/a principles of microeconomics by frank,...
TRANSCRIPT
10-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Chapter 10
Monopoly and other forms of imperfect competition
10-2 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Imperfect competition
• Perfect competition– Firms have no control over price.– Firms produce homogenous products.– Price equal the marginal cost of production.– Long-run economic profits are not possible due to free
entry and exit.– An ideal market that maximises economic surplus.– A situation that does not always exist.
10-3 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Imperfect competition
• Imperfectly competitive firms– Have some control over price.– Price may be greater than the cost of production.– Long-run economic profits are possible.– Face a downward-sloping demand curve.– Contribute to loss of efficiency. – Are very common in every economy.– Reduce economic surplus to varying degrees by
restricting output.
10-4 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Imperfect competition
• Different forms of imperfect competition– Pure monopoly– Oligopoly– Monopolistic competition
10-5 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Imperfect competition
• Various forms of imperfect competition– Pure monopoly (most inefficient)
The only supplier of a unique product with no close substitutes, examples
• City power provider• Only petrol station in a small town• AFL football league
10-6 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Imperfect competition
• Various forms of imperfect competition– Oligopoly (more efficient than a monopoly)
A firm that produces a product for which only a few rival firms produce close substitutes, examples
• Major banks in Australia• BP, Shell, Mobil• Airlines
10-7 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Imperfect competition
• Different forms of imperfect competition– Monopolistic competition (closest to perfect competition)
A large number of firms that produce slightly differentiated products that are reasonably close substitutes for one another, examples
• Restaurants in Lygon Street• Novels, films, CDs
10-8 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Imperfect competition
• The essential difference between perfectly and imperfectly competitive firms comes from possible substitutability of products– The perfectly competitive firm faces a perfectly elastic
demand for its product.– The imperfectly competitive firm faces a downward-
sloping demand curve.
10-9 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Imperfect competition
• In perfect competition – Supply and demand determine equilibrium price. The firm
has no market power.– At the equilibrium price, the firm sells all it wishes.
10-10 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Imperfect competition
• With perfect competition – If the firm raises its price, sales will be zero.– If the firm lowers its price, sales will not increase.– The firm’s demand curve is the horizontal line at the
market price.
10-11 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Imperfect competition
• With imperfect competition – The firm has some control over price or some market
power.– The firm faces a downward-sloping demand curve.– In the case of a monopoly, the firm’s demand curve is the
market demand curve.
10-12 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
The demand curves facing perfectly and imperfectly competitive firms
Quantity
$/u
nit
of
ou
tpu
t
DMarket
price Pri
ce
QuantityD
Perfectly competitive firm Imperfectly competitive firm
10-13 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Five sources of market power
• Exclusive control over inputs A singer with gifted talent
• Government-created monopolies A new pharmaceutical drug Taxi licenses
• Economies of scale (natural monopolies) City water supply
• Network economies Microsoft Windows
10-14 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Economies of scale and the importance of fixed costs
• Firms with large fixed costs and low variable costs – Have low marginal costs– Average total cost declines sharply as output increases– Have higher proportion of fixed cost than variable cost in
average total cost– Economies of scale will exist
10-15 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Total and average total costs for a production process with economies of scale
Quantity
To
tal c
ost
($/
year
)
F
Q0
F + Q0
TC = F + MQ
Total cost rises at a constant rate as output rises
Ave
rag
e co
st (
$/u
nit
)Quantity
ATC = F/Q + M
M
Average costs decline and isalways higher than marginal cost
10-16 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Costs for two computer game producers (1)
Nintendo PlayStation
Annual production1,000 000 1,200 000
Fixed cost $200 000 $200 000
Variable cost $800 000 $960 000
Total cost $1,000 000 $1,160 000
Average total cost per game $1.00 $0.97
Observations• Fixed costs are a relatively small share of total cost.• Cost/game is nearly the same.
10-17 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Costs for two computer game producers (2)
Annual production 1,000 000 1,200 000
Fixed cost $10,000 000 $10,000 000
Variable cost $200 000 $240 000
Total cost $10,200 000 $10,240 000
Average total cost per game $10.20 $8.53
Nintendo PlayStation
Observations• Fixed costs are a relatively large share of total cost.• PlayStation has a $1.67 average cost advantage.• PlayStation can lower prices, cover cost and attract customers.
10-18 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Annual production 500 000 1,700 000
Fixed cost $10,000 000 $10,000 000
Variable cost $100 000 $340 000
Total cost $10,100 000 $10,340 000
Average total cost per game $20.20 $6.08
Costs for two computer game producers (3)
Nintendo PlayStation
• Shift of 500,000 units to PlayStation.• Nintendo’s average cost increases to $20.20/unit.• PlayStation average cost falls to $6.08.• A large number of firms cannot survive when the cost differential is
high.
10-19 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Economies of scale and the importance of fixed costs
• Fixed investment in research and development has been increasing as a share of production costs.
1984 20% 80%1990 80% 20%
Cost of producing a computerFixed cost Variable cost
Software Hardware
10-20 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Economies of scale and the importance of fixed costs (cont.)
• Thinking as an economist– Why does Intel sell the overwhelming majority of
microprocessors used in personal computers?
• As fixed costs become more important, the perfectly competitive pattern becomes less common.
10-21 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Profit maximisation for the monopolist
• A price taker (perfect competition) and a price setter (imperfect competition) share two economic goals. They want– to maximise profits– to select the output level that maximises the difference
between TR and TC, where MR = MC.
10-22 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Profit maximisation for the monopolist
• Marginal revenue for the monopolist– Firms in perfect competition and monopoly firms
(assuming a single price firm) Both increase output when MR > MC. Calculate MC the same way. Do not have the same MR at a given price.
• In perfect competition: MR = P• In monopoly: MR < P
10-23 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
The monopolist’s benefit from selling an additional unit
Pri
ce (
$/u
nit
)
Quantity (units/week)
D
8
8
2
6
3
5
• If P = $6, then TR = $6 x 2 = $12• If P = $5, then TR = $5 x 3 = $15• The MR of selling the 3rd unit = $3 (15-12)• For the 3rd unit, MR = $3 < P = $5
10-24 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
• Observations– MR declines as quantity
increases.– MR is the change between two
quantities.– MR < P because price must be
lowered to sell an additional unit.
P Q TR MR
3
1
-1
Marginal revenue in graphical form
6 2 12
5 3 15
4 4 16
3 5 15
10-25 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Pri
ce &
mar
gin
al r
even
ue
($/u
nit
)
Quantity (units/week)
8
8
D
432-1
3
5
1
MR
Marginal revenue in graphical form
P Q TR MR
3
1
-1
6 2 12
5 3 15
4 4 16
3 5 15
10-26 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
The marginal revenue curve for a monopolist with a straight-line demand curve
Pri
ce
QuantityObservations• The vertical intercept, a, is the same for MR and D.• The horizontal intercept for MR, Q0/2, is one half the demand
intercept, Q0..
D
Q0
a
Q0/2
a/2
MR
10-27 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Profit maximisation for the monopolist
• Profit maximising decision rule:– When MR > MC, output should be increased.– When MR < MC, output should be reduced.– Profits are maximised at the level of output for which
MR = MC.– Set the price that consumers are willing to pay at that
level of output.
10-28 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
The monopolist’s profit-maximising output level
Pri
ce (
$/u
nit
of
ou
tpu
t)
Quantity (units/week)
6
D
3
12 24
Marginal cost
2
4
MR
8
Observations• If P = $3 & Q = 12 MR < MC
and output should be reduced.
• Profits are maximised at 8 units where MR = MC.
• The maximum single price at which 8 units can be sold is P=$4.
10-29 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Even a monopolist may suffer an economic loss
Pri
ce (
$/m
inu
te)
Minutes (millions/day)
Pri
ce (
$/m
inu
te)
Minutes (millions/day)
2420
0.12
0.10ATC
20
0.08
0.10
ATC
Economic loss= $400 000/day
Economic profit= $400 000/day
D
0.05 MC
MR
D
0.05 MC
MR
Being a monopolist doesn’t guarantee an economic profit
10-30 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
D
3
12
6
24
Marginal cost
The socially optimalamount occurs whereMC = D(MR) at 12 units
The demand and marginal cost curves for a monopolist
Pri
ce (
$/u
nit
of
ou
tpu
t)
Quantity (units/week)
Why the invisible hand breaks down under monopoly
10-31 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
2
4
MR
8
• The profit maximising level of output of 8 units, where MR = MC, is less than the socially optimal output of 12.
• Between 8 and 12, MB to society > MC to society.
• Single-price monopolist will not increase output because MR<MC.
The demand and marginal cost curves for a monopolist (cont.)
Pri
ce (
$/u
nit
of
ou
tpu
t)
Quantity (units/week)
D
12
6
24
Why the invisible hand breaks down under monopoly
3
Marginal cost
10-32 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
2
4
MR
8
• Because MR < P, the monopoly produces less than the socially optimal amount
• The deadweight loss of the monopoly to society = (1/2)($2/unit)(4units/wk) = $4/wk.
Deadweight loss
The demand and marginal cost curves for a monopolist (cont.)
Pri
ce (
$/u
nit
of
ou
tpu
t)
Quantity (units/week)
D
12
6
24
Why the invisible hand breaks down under monopoly
3
Marginal cost
10-33 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Why the invisible hand breaks down under monopoly
• Monopoly– Profits are maximised
where MR = MC– P > MR– P > MC– Deadweight loss
• Perfect competition– Profits are maximised
where MR = MC– P = MR– P = MC– No deadweight loss
10-34 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Why the invisible hand breaks down under monopoly (cont.)
• Difficulties in reducing the deadweight loss of monopolies– Enforcing competition and anti-monopoly laws– Patents, copyrights and innovation– Natural monopolies
10-35 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
• Price discrimination– The practice of charging different buyers different prices
for essentially the same good or service, where differences do not simply reflect differences in costs of supplying different buyers.
• Examples of price discrimination– Senior citizens and student discounts on movie tickets– Supersaver discounts on air travel– Rebate coupons
Using discounts to expand the market
10-36 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Using discounts to expand the market (cont.)
• Thinking as an economist– Why do many movie theatres offer discount tickets to
students?– Why do most airlines have peak and off-peak rates?– Why do fitness clubs have a membership fee and per unit
price?
10-37 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
• Example– Rosie can edit term papers for eight students each
with a different reservation price. If Rosie’s opportunity cost of her time to edit each paper is $29 and she must charge a single price to each student, how many term papers should Rosie edit? How much economic profit would she make?
Using discounts to expand the market (cont.)
10-38 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Total and marginal revenue from editing
Reservation price Total revenue Marginal revenueStudent ($ per paper) ($ per week) ($ per paper)
A 40 40
B 38 76
C 36 108
D 34 136
E 32 160
F 30 180
G 28 196
H 26 208
40
36
32
28
24
20
16
12
10-39 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Using discounts to expand the market
• Example– How many manuscripts should Rosie edit when
she must charge all buyers the same amount? Opportunity cost = $29 TR = P x Q, or for 4 papers, 4 x $34 = $136/wk MR is the difference in TR from adding another
student If MR > MC: increase output
10-40 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Why the invisible hand breaks down under monopoly
• Example– How many manuscripts should Rosie edit?
Rosie edits 3 papers• TC = 3 x $29 = $87
• TR = $108
• Economic profit = $108 - $87 = $21/wk
• Accounting profit = $108
10-41 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Why the invisible hand breaks down under monopoly• Example
– How many manuscripts should Rosie edit? Opportunity cost = $29 Must charge the same price Reservation price > opportunity cost for student
A to F Socially efficient number is 6
• TR = 6 x $30 = $180
• TC = 6 x $29 = $174
• Economic profit = $180- $174 = $6
• Accounting profit = $180
10-42 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Why the invisible hand breaks down under monopoly
• Example– If Rosie can price discriminate, how many papers
should she edit? Assume Rosie can charge each student their
reservation price.
10-43 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Example
ReservationStudent
price
A 40
B 38
C 36
D 34
E 32
F 30
G 28
H 26
• Rosie would edit A to F• TR = $40 + $38… = $210• TC = 6 x $29 = $174• Economic Profit = $210 -
$174 = $36/wk• Economic profit is $30
more than when she had to charge a single price.
10-44 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Using discounts to expand the market
• Perfectly discriminating monopolist– Charging each buyer exactly their reservation price
Economic surplus is maximised Consumer surplus is zero Economic surplus = producer surplus No deadweight loss
10-45 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Using discounts to expand the market (cont.)
• Limitations to perfect price discrimination– Seller will not know each buyer’s reservation price.– Low price buyers could resell to other buyers at a higher
price.
10-46 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Using discounts to expand the market (cont.)
• Group pricing– A form of price discrimination where different discounts
are offered in different submarkets, while members of particular submarket all receive the same discount.
– Group pricing essentially allows a firm to divide its market into two submarkets in which it can charge two different prices.
– In each market the firm can charge the same price to every buyer like an ordinary monopolist.
– Therefore the firm should keep expanding output in each submarket as long as MR in that submarket exceeds MC.
10-47 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Using discounts to expand the market (cont.)
• Group pricing– Question: Suppose Rosie knows that students whose
reservation prices are at least $34 are science students, while those whose reservation prices are below $34 are commerce students. How much should Rosie charge for editing if she uses group pricing?
10-48 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Using discounts to expand the market (cont.)
• The hurdle method of price discrimination– The practice by which a seller offers a discount to all
buyers who overcome some obstacle.– Examples:
Rebate coupon Bundling of goods Foregoing extras that come with a higher price
10-49 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Using discounts to expand the market (cont.)
• The hurdle method of price discrimination is used to solve two problems:– Seller does not know the reservation prices.– Seller must separate high and low price buyers.
10-50 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Using discounts to expand the market (cont.)• A perfect hurdle
– Completely segregates buyers whose reservation prices lie above it from others whose reservation prices lie below it, imposing no cost on those who jump the hurdle.
• What do you think?– Is a perfect hurdle possible?
10-51 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Using discounts to expand the market (cont.)
• Question– How much should Rosie charge for editing if she uses a
perfect hurdle?
• Assume – Rosie offers a mail in rebate coupon.– Students with at least a $36 reservation price never use
the coupon.– Students with a reservation price below $36 use the
coupon.– Opportunity cost = $29.– Discount coupon = $4.
10-52 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Price discrimination with a perfect hurdle
Reservation price Total revenue Marginal revenueStudent ($ per paper) ($ per week) ($ per paper)
A 40 40
B 38 76
C 36 108
D 34 34
E 32 64
F 30 90
G 28 112
H 26 130
40
36
32
List price submarket
Discount price submarket
34
30
26
22
18
10-53 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Using discounts to expand the market (cont.)
• Solution– TR = (3)(36) + (2)(32) = $172– MC = ($5)($29) = $145– Economic profit = $27/wk
• Question– Is price discrimination a desirable thing?
The hurdle method raised economic surplus.
10-54 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
• Producer surplus– Single price = 3(36 - 29) = $21/wk– Discount price = 3(36 - 29) = $21/wk
2(32 - 29) = $6/wk
$27/wk
Calculating economic surplusConsumer surplus Reservation price Actual price Consumer surplus
A $40 $36 $4
B $38 $36 $2
C $36 $36 $0
BothSingle price& discount
Without discount $6
D $34 $22 $2
With discount $8
Using discounts to expand the market (cont.)
10-55 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Using discounts to expand the market (cont.)
• Question– Is Rosie’s discount rebate socially efficient?
10-56 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Using discounts to expand the market (cont.)
• Examples of price discrimination– Temporary sales– Book publishers and paperback books– Automobile producers offer various models– Commercial air carriers– Movie producers
10-57 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Using discounts to expand the market (cont.)
• Thinking as an economist– Why might an appliance retailer instruct its salespeople
to hammer dents into the sides of its stoves and refrigerators?
10-58 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Using discounts to expand the market (cont.)
• Summary– Single price monopolies are inefficient because P > MR.– The hurdle method of price discrimination reduces the
inefficiency.– Hurdles are not perfect, therefore, there will be some
efficiency loss.– The more finely the seller can discriminate, the smaller
the efficiency loss.
10-59 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Public policy towards competition
• National competition policy– Competitive markets will generally serve the interests of
consumers.– Wider community can provide strong incentives for
suppliers.– Promote efficiency and innovation.
10-60 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
• The Trade Practices Act and the ACCC– Promotion of competition and fair trading– Provision of consumer protection
• Thinking as an economist– How does the ACCC use cost-benefit thinking in applying
the Act’s authorisation and notification processes?
Public policy towards competition (cont.)
10-61 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
• Regulating natural monopolies– State ownership, marginal cost pricing versus the cost of
less incentive for innovation– Exclusive contracting for natural monopoly
Competition for the contract sets P = MC Difficulty when fixed costs are high such as electric utilities
Public policy towards competition (cont.)
10-62 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and JenningsSlides prepared by Nahid Khan
Public policy toward natural monopoly
• Regulating natural monopolies in Australia• Abandoned direct regulation• Incentive compatible regulatory regimes such as
price caps