Download - Alison economics project powerpoint format
Price Discrimination Cartoon
Interview Style.
Hi my name is Bill Gates, the current chairman of Microsoft which is the worlds largest personal computer software company.
Microsoft is an example of a Monopoly and so is known as a Price Maker because it dominates the Windows Market.
Monopoly companies often are involved in Price Discrimination because they have market power.
Hi Bill I’m Jack! what is Price Discrimination?
Thats a very good question Jack.
Basically it is when firms try to sell the same good to different customers for different prices even though the costs of producing for the two customers are the same.
But why would a monopolist do this Bill?
Well Jack , they would do this to maximise profits for the firm.
Remember that Marginal Cost is the change in total cost that arises when quantity produced changes by one unit. A monopolist charges above marginal cost.
They charge the customer a price closer to his or her willingness to pay.
Think of when a new book is published such as Harry Potter. At first an expensive hardback edition is released and eventually a cheaper paperback one is.The difference in the priniting costs between the two is very litte compared to the difference in price but it is based on the willingness of the customer to pay. The 'eager' fans will pay more at first than those who wait.
But Bill how do you know a customers willingness to pay?
Well Jack, Perfect Price Discrimination is when the monopolist knows exactly the willingness to pay of each customer and can charge them a different price
But in reality price discrimination is not always perfect.
Normally firms divide their customers into groups based on age, income,nationality.
Below are examples of price discrimination.
Cinemas price discriminate by
offering different prices to children,adults and senior citizens because
they know seniors citizens and children
have a lower willingness to pay. The price of providing the seat is the same for
everyone.
Airlines also price discriminate by
dividing customers into personal and business
travellers. Business travallers have a higher willingness to pay. Also
the time of year will affect the price as
well.e.g at Christmas time prices go up.
When a firm offers a discount the also price discrimiinate. They can
do this by offering coupons or lower
prices to those that buy higher quantities
of a good.
Examples of Price Discrimination
Public Policy Toward Monopolies
Are Monoplies a good thing? And if not how can u respond to them?
Hi Jack ! im Enda Kenny, Head of the Irish Government and I’m going to be talking about Public Policy Towards Monopolies.
No they are not because they charge prices above marginal cost and fail to allocate their resources efficiently.
Policy Makers in the Government can respond to this problem in 4 ways:
1.More Competitive
Industry
2.Regualte Behaviour of the
Monopolies
3.Public Ownership
4.Doing Nothing at all
H Jacki ! I’m Michael O’Leary the CEO of Ryanair. Im going to be talking about the first way a government can respond to a monopoly which is to make the industry more competitive
Governments to promote competition in an Industry will closely examine a proposed merger between two companies that already have a significant a market share.
How and why would a Government do that?
Well Jack take for example at the moment I am trying to take over Aer Lingus. Since Ryanair and Aer Lingus are two of the biggest competing airlines in the market the consequences of the merger need to be closely examined because it could make the market less competitive!
In Europe each country has their own Competition Authority. These National Competition Authorites co-operate with each other and with the Eu Competition Comission through the ECN( European Competition Network). Take a look below Jack!
The ECN
National Competition Authorities.
Other National Competition Authorities.
EU Competition Commission.
Ah I see how the ECN works now! Thanks Michael!
http://www.youtube.com/watch?v=S4rZ_-dKxlw
Take a look at this video from Financial News about the takeover bid!
But how are these competition laws enforced Michael?
All National Competition Legislation has to be in line with EU Legislation overall.
Cross border cases are dealth with by EU Law
And what do these laws cover Michael?
Against Cartels which prevent
Free Trade.
Monitor and Examine
Acquisitions and Joint Ventures.
To Ban anti-competitive
price strategies such as price fixing.
Below is an easy to read diagram to help you understand the areas covered by law.
But remember Jack, mergers can also be beneficial. Companies can merge to lower costs through more efficient production. These are known as synergies
I’m back Jack to explain the second way governments can respond to a monopoly and that is through Regulation!
Welcome Back Enda! How does the Government do this? Can you give me some examples?
Think of Natural Monopolies that you know such as utility companies like gas, water and electricity.
We the government regualte their prices and stop them charging the price they want!
Oh yeah I know some examples!
Yes Jack they are some examples of utility companies that the government regulates!
The next question to decide is how the government should set a price for a natural monopoly?
And how does the governement set this price Enda?
For a Natural Monopoly
AVERAGE COST > MARGINAL COST
Firstly you cannot set the price equal to the company’s marginal cost because in general natural monopolies have a declining average total cost and marginal cost is less than this so if the price was set to equal the marginal cost, the company would lose money!
So how does the regulator respond to this price problem?
They can SUBSIDIZE the monopolist.
But how do they raise the money to pick up the losses from this marginal cost pricing?
They raise money through TAXATION.
Public Ownership of a Monopoly
Firms in a Competitive Market benefit from lower costs because this leads to higher profits.
However when costs fall for a monopoly the regulator willl reduce the price so there is no incentive for a monopoly to lower costs.
So far Jack we have looked 2 ways in which a government can respond to a monopoly. That is by making the industry more competitive and by regulation.
And what is the 3rd Enda?
Public Ownership
Oh yes I know that this is called a nationalized Industry! The government runs the monopoly!
Yes Jack! And now that you have been studying economics, which do you think is better, private or public ownership?
Well a private firm would have more of an incentive to lower costs because that will mean higher profits but with public ownership if they firm loses money the taxpayer will have to pay the losses!!!
An excellent point Jack.
Look below for some examples of Public Owned Companies in Ireland.
Doing Nothing
Charge prices above marginal cost , causing deadweight
losses.
Inefficiences can be mitigated through Price Discrimination or by Policy Makers like the
Government.
Downward Sloping Demand Curve.
Monopoly power is limited because they cannot raise
prices too much because of substitutes.
Monopoly
The 3 ways to deal with a monopoly that we have discussed also have drawbacks.
So the government can also do nothing and let them regulate themselves.
Okay Enda so now that we have discussed a monopoly I think I can draw some conclusions abou them!
Yes Jack they are all excellent conclusions about a monopoly. I hope that you have learned the difference now between a monopoly and a competitive firm! I have summarised them for you below!
Competition
Many Firms
MR=MC
Price=MCPrice
Discrimination not Possible
Cannot earn economic
profits in the long run.
Monopoly
One Firm
MR=MC
Price > MCPrice
Discrimination is Possible
Can earn economice Profit in the
long run.
Thank you so much Enda, Michael, Bill and Harry! I have learnt a lot about what price discrimination is and about the behaviour of monopolies in our society!
I even have now some interesting real life examples of them and it was great to get insight from some of the people behind them!