Monopolistic Competition, Price DiscriminationMonopolistic Competition, Price DiscriminationBrandon Chang, Thomas ChangBrandon Chang, Thomas Chang
Monopolistic Competition Monopolistic Competition
• Characteristics• Market structure where there are large
number of sellers.• Sells slightly differentiated products.• Has some price setting power• Very low entry barrier to market • Allocatively and productively inefficient
Monopolistic Competition in the Long Run
Monopolistic Competition in the Long Run
• Firms in monopolistic competition cannot make economic profit in the long run.
Short RunShort Run
• Short run similar to monopoly market
• Demand is downward sloping
• Marginal Revenue is below demand curve– Slopes down twice as
steeply
Long RunLong Run
• Caused by low entry barrier to market
• When firms make economic profit other firms join– The demand and marginal
revenue decreases and flattens out
• No economic profit• New Demand is tangent to
the ATC curve
Economic LossEconomic Loss
• Once firms start facing economic losses, they can simply leave the market.
• This increases the demand for other firms inside the market.
EfficiencyEfficiency
• Productively inefficient• - Not producing at a quantity where average
total cost is lowest• Firms are not using their resources in the least
cost manner.• Allocatively inefficient• - The demand curve (marginal benefit) is not
equal to marginal cost• Firms are restricting their output to make profit• Producing at less than socially optimal quantity
DefinitionDefinition
Price Discrimination: A business sells the same good to
customers at different prices The cost to manufacture the
product is the same
Chang AirlinesChang Airlines
Chang AirlinesChang Airlines
Chang AirlinesChang Airlines
Requirements for Price Discrimination
Requirements for Price Discrimination
• Price discrimination is not possible when a good is sold in a competitive market since there are many firms all selling at the market price. In order to price discriminate, the firm must have some market power.
• For a firm to price discriminate, it must have some market power
• Monopoly, Oligopoly, Monopolistic Competition (not Perfect Competition)
• For a firm to price discriminate, it must know the consumers’ willingness to pay
Effects of Price DiscriminationEffects of Price Discrimination
• Two important effects of price discrimination:• It can increase the monopolist’s profits.
• It can reduce deadweight loss.
Profit
(a) Monopolist with Single Price
Price
0 Quantity
Deadweightloss
DemandMarginalrevenue
Consumersurplus
Quantity sold
Monopolyprice
Marginal cost
Single-Price MonopolistSingle-Price Monopolist
A monopolist who charges everyone the same price
Deadweight Loss and Efficiency
Deadweight Loss and Efficiency
Quantity0
Price
Demand(value to buyers)
Marginal cost
Value to buyersis greater thancost to seller.
Value to buyersis less thancost to seller.
Costto
monopolist
Costto
monopolist
Valueto
buyers
Valueto
buyers
Efficientquantity
Deadweight LossDeadweight Loss
• The Inefficiency of Monopoly– The monopolist produces less than the socially
efficient quantity of output.
Deadweight Loss and Efficiency
Deadweight Loss and Efficiency
Quantity0
Price
Deadweightloss
DemandMarginalrevenue
Marginal cost
Efficientquantity
Monopolyprice
Monopolyquantity
Deadweight LossDeadweight Loss
• Because a monopoly sets its price above marginal cost, it places a wedge between the consumer’s willingness to pay and the producer’s cost.
• This wedge causes the quantity sold to fall short of the social optimum.
ExamplesExamples
Examples of Price Discrimination• Movie tickets• Airline prices• Discount coupons• Financial aid• Quantity discounts
Multiple Choice: Q. 1Multiple Choice: Q. 1
1. Which of the following is a characteristic of a monopolistic competition?
a. A standardized product
b. Many sellers
c. Barrier to entry
d. Positive long-run profits
e. A perfectly elastic demand curve
Multiple Choice: Q. 1Multiple Choice: Q. 1
B
Multiple Choice: Q. 2Multiple Choice: Q. 2
Which of the following results is possible for a monopolistic competitor in the short run?
I. positive economic profit
II. Normal profit
III. Loss
a. I only
b. II only
c. III only
d. I and II only
e. I, II, III
Multiple Choice: Q. 2Multiple Choice: Q. 2
E
Multiple Choice: Q. 3Multiple Choice: Q. 3
Which of the following results is possible for a monopolistic competitor in the short run?
I. positive economic profit
II. Normal profit
III. Loss
a. I only
b. II only
c. III only
d. I and II only
e. I, II, III
Multiple Choice: Q. 3Multiple Choice: Q. 3
B
Multiple Choice: Q. 4Multiple Choice: Q. 4
The long-run outcome in a monopolistically competitive industry results in
a. Inefficiency because firms earn positive economic profits
b. Efficiency due to excess capacity
c. Inefficiency due to product diversity
d. Efficiency because price exceeds marginal cost
e. A trade-off between higher average total cost and more product diversity
EMultiple Choice: Q. 4Multiple Choice: Q. 4
Multiple Choice: Q. 5Multiple Choice: Q. 5
1. Which of the following characteristics is necessary in order for a firm to price discriminate?
a. free entry and exit
b. differentiated product
c. many sellers
d. some control over price
e. horizontal demand curve
Multiple Choice: Q. 5Multiple Choice: Q. 5
D
Multiple Choice: Q. 6Multiple Choice: Q. 6
2. Price discrimination
a. is the opposite of volume discounts.
b. is a practice limited to movie theaters and the airline industry.
c. can lead to increased efficiency in the market.
d. rarely occurs in the real world.
e. helps to increase the profits of perfect competitors.
Multiple Choice: Q. 6Multiple Choice: Q. 6
C
Multiple Choice: Q. 7Multiple Choice: Q. 7
3. With perfect price discrimination, consumer surplus
a. is maximized.
b. equals zero.
c. is increased.
d. cannot be determined.
e. is the area below the demand curve above MC.
Multiple Choice: Q. 7Multiple Choice: Q. 7
B
Multiple Choice: Q. 8Multiple Choice: Q. 8
4. A price discriminating monopolist will charge a higher price to consumers with
a. a more inelastic demand.
b. a less inelastic demand.
c. higher income.
d. lower willingness to pay.
e. less experience in the market.
Multiple Choice: Q. 8Multiple Choice: Q. 8
A
True or False: Q. 1True or False: Q. 1
• A single-price monopolist sells to some customers that would not find the product affordable if purchasing from a price-discriminating monopolist.
True or False: Q. 1True or False: Q. 1
FALSE
True or False: Q. 2True or False: Q. 2
• A price-discriminating monopolist creates more inefficiency than a single-price monopolist because it captures more of the consumer surplus.
True or False: Q. 2True or False: Q. 2
FALSE
True or False: Q. 3True or False: Q. 3
• Under price discrimination, a customer with highly elastic demand will pay a lower price than a customer with inelastic demand.
True or False: Q. 3True or False: Q. 3
TRUE
Skill Testing QuestionSkill Testing Question
Which of the following are cases of price discrimination and which are not? In the cases of price discrimination, identify the consumers with high price elasticity of demand and those with low price elasticity of demand.
a. Damaged merchandise is marked down.
b. Restaurants have senior citizen discounts.
c. Food manufacturers place discount coupons for their merchandise in newspapers.
d. Airline tickets cost more during the summer peak flying season.