econ 308 week 06 monopoly & monopoly pricing (chapter 7)
TRANSCRIPT
ECON 308
Week 06
Monopoly & Monopoly Pricing
(Chapter 7)
Market structure
• What is a market?• All firms and individuals willing and able to
buy or sell a particular product
• What is market structure?• Defined by attributes of the market
environment
Demand Facing the Firm
$P $P $P $P
Q Q Q Q
D1
D2
D3 D4
Increasing degrees of Competition Increasing degrees of Market Power
Market structurethe archetypes
• Monopoly
• Oligopoly
• Monopolistic competition
• Perfect competition
Perfect competitioncharacteristics
• Many buyers and sellers
• Product homogeneity
• Low cost and accurate information
• Free entry and exit
• Best regarded as a benchmark
Price Taker Firm Demand CurvePrice Taker Firm Demand Curve$P
Q/T
Pe
Qe
$P
Q/T
Pe
Market Firm
D=MR
D
DS
S
Qe
Firm supply
• Short run– Marginal cost curve above average
variable cost– P* = SRMC
• Long run– Long-run marginal cost curve
above long-run average cost
Long-Run Industry EquilibriumLong-Run Industry Equilibrium$P
Q/T
Pe
Qe
$P
Q/T
Pe
Market Firm
D
D
DS
SMC
ATC
Qe
Monopoly
• Strong barriers to entry single supplier
• Profit maximization– faces market demand and sets MR=MC
• Unexploited gains from trade
Sources of Market Power:Barriers to entry
Incumbent reactions
• Specific assets• Economies of scale• Excess capacity• Reputation effects
Incumbent advantages• Precommitment
contracts• Licenses and patents• Learning-curve effects• Pioneering brand
advantages
Demand Facing the Firm$Price
Qty/T
Demand
D
$10 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7 8
Total Revenue $Price
Qty/T
Demand
D
$10 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7
Marginal Revenue =Additional Revenue $Price
Qty/T
Demand
D
$10 9 8 7 6 5 4 3 2 1
1 2 3 4 5 6 7
Derivation of Marginal RevenuePrice Quantity Total
RevenueMarginal Revenue
$ 10.00 1 $ 10.00
$ 9.00 2 $ 18.00 $ 8.00
$ 8.00 3 $ 24.00 $ 6.00
$ 7.00 4 $ 28.00 $ 4.00
$ 6.00 5 $ 30.00 $ 2.00
$ 5.00 6 $ 30.00 $ 0
$ 4.00 7 $ 28.00 - $ 2.00
$ 3.00 8 $ 24.00 - $ 4.00
$ 2.00 9 $ 18.00 - $ 6.00
Marginal Revenue
$Price
Qty/T
Demand
MR
D
Marginal Revenue & Elasticity$Price
Qty/T
DemandMR
Ed > 1
Ed < 1
Ed = 1
Monopoly Output$Price
Qty/T
Demand
MR
MC
D
Qm
Pm
Mc
Market Power: No Close Substitutes$Price
Qty/T
Demand
MR
MC
D
Qm
Pm
Mc
Market Power: Few Close Substitutes$Price
Qty/T
Demand
MR
MC
D
Qm
Pm
Mc
Market Power: Many Close Substitutes$Price
Qty/T
Demand
MR
MC
D
Qm
Pm
Mc
No Market Power: Many Identical Substitutes$Price
Qty/T
Demand
MC
P = MR
Qm
P = Mc
Monopoly Profit?Monopoly Profit?
Qty/T
Demand
MR
MC
D
Qm
PmACProfit
Monopoly After Entry of CompetitionMonopoly After Entry of Competition
Qty/T
Demand
MR
MC
D
Qm
PmAC
$ Price
Efficiency Loss ?Efficiency Loss ?
Qty/T
Demand
MR
MC
D
Qm
Pm
Mc
Sources of Monopoly Power Barriers to Entry
• Absolute Cost Advantage: Unique access to production technique or an essential input.
• Natural Monopoly: Economies of Scale
• Product differentiation
• Regulatory Barriers: Patents, copyrights, franchise, license.
Price DiscriminationPrice Discrimination
• Charging different prices for different units sold.
• Allows firms to increase sales and capture more of consumer surplus.
Monopoly Pricing: Single PriceMonopoly Pricing: Single Price
$ Price
Qty/T
Demand
Marginal Cost
MR
Pm
Qm
Potential Efficiency loss
First DegreeFirst Degree: Charging different : Charging different customers different prices.customers different prices.
• Auction
• College scholarships
First DegreeFirst Degree: Different Prices for different buyers
$ Price
Qty/T
Demand
Marginal Cost
MR
Tuition
Qm
Scholarship Amount
First DegreeFirst Degree: Charging different : Charging different customers different prices.customers different prices.
• Auction
• College scholarships
• IBM Punch Cards
• Polariod Camera, Film
• Ink Jet Printers, Cartridges
• Swiffer, pads
• Glllette Razor, Blades
Second DegreeSecond 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)
• Tires: Buy 3, get 4th free.• Soft Drinks:Product prices,
– medium16 oz. $ 1.09, .07/oz.– large: 22 oz. $ 1.19, extra 6 oz. @ .02/oz.– extra large:32 oz. $1.29, extra 10 oz. @ .01/ oz.
• Two Part Tariff: Entry Fee plus per unit– Costco: Membership & Price
Third DegreeThird Degree:: Charging different prices to different
groups according to different elasticity of Demand. • Grocery coupons• Prescription drugs in different countries.• Doctors medical services• Newly released unique products • Movies: Children, Seniors, Middle; Matinee • Mail Order Catalogues: Old vs. New Customer• Freeway Adjacent Restaurant• Brand name mixers on Holiday Sale• Mattresses: Match any advertised price• Menu
Necessary Conditions for Successful Necessary Conditions for Successful Price DiscriminationPrice Discrimination
• Ability to identify and separate buyers by elasticity of demand.
• Collect different prices from the different buyers
• Prevent Resale