Monopoly

Price Discriminating Monopolies

- Definition: Price discrimination occurs when a firm charges different prices to different customers for REASONS OTHER THAN DIFFERENCES IN COST. (Ex. student / senior discounts.) - Prices change due to DEMOGRAPHIC reasons.

ATC Pricing Regulation

- Does not give us an efficient outcome, BUT it gets us as close to efficiency as possible without causing the firm to exit the market. Compared to profit max. pricing: - Price is lower for consumer. - Quantity (output) is higher. - Consumer surplus is higher. - Producer surplus is lower. - Dead weight loss is lower.

Regulator will choose ATC pricing because...

- It is the closest price where the regulator can get to allocative efficiency in the LR. - It is a lower price and higher quantity compared to profit max. - It has the lowest DWL in the long run.

What can the government do about natural monopoly?

- Let it operate freely. (No regulation.) => Profit Max. - Government can take over the industry. - Government can regulate it. + MC Pricing: Set price where MB = MC. or... + ATC Pricing: Set price where MB = ATC

MC Pricing Regulation

- Seems like the right solution at first glance because it looks like the market would be at its most efficient point. (MC = MB) HOWEVER, with MC pricing... - Profit < 0 - The firm would exit the industry in the LR. - No other firms would be willing to enter the market. - No output would be produced. Therefore, MC pricing is bad in the LR.

Perfect Price Discrimination

- The firm charges each individual customer the maximum price that the they would be willing to pay. Ex. Car dealership. (Not PERFECT price discrimination, but very close to it.) Each customer pays a different price.

Third Degree Price Discrimination

- The firm will charge a DIFFERENT PRICE for the SAME PRODUCT in DIFFERENT MARKETS. Ex. Any firm that gives a senior discount or student discount.

What is bad about monopoly?

1) Consumer options are limited (no close substitutes). 2) Profits DO NOT signal firms to enter the industry. - Cannot enter because of the barriers to entry. 3) There is an allocative inefficiency. - For a monopolist, Q* is less than QE. - At Q*, MB > MC. At QE, MB = MC.

Assumptions

1) ONE firm 2) Produce a UNIQUE product. +NO CLOSE SUBSTITUTES. 3) HIGH BARRIERS to entry. 4) Firm faces market demand curve. (Relatively inelastic).

Barriers to Entry

1. Legal Barriers: - Patent - Licenses and franchises 2. A single firm has sole control of a resource essential to an industry. 3. Economies of Scale: If LRATC is decreasing at a high amount of OUTPUT, it will be difficult, and likely inefficient, for a new firm to enter the industry to compete with an established firm. (Ex. Water, utilities.)

Recall: In pC, the firm is a PRICE TAKER. - But, it gets to choose what quantity to produce at the market price. - Will (always) choose where MR = MC. In MONOPOLY, the firm has some power over the price. 1) The firm first chooses the quantity (Q*) based on where [1]. 2) Then, it chooses the price. It charges the [2] price that consumers are willing and able to pay for the quantity (Q*). (i.e. from the Demand curve). - HOWEVER, recall that the price is still PARTIALLY determined by what [3] are willing and able to pay!

1. MR = MC 2. highest 3. consumers

Profits are maximized where [1]. In PC, MR [2] P. For a MONOPOLIST, MR [3] P. The MR curve lies [4] the demand curve.

1. MR = MC. 2. = 3. < 4. below

Requirements for Price Discrimination

1. The firm must have a DOWNWARD-sloping demand curve. (Some people willing to pay more than others.) 2. The firm must be able to identify which consumers are willing to PAY MORE. (Which consumers have a more elastic / inelastic demand.) 3. The firm must be able to prevent low-price customers from reselling to high-price customers. (Ex. Receiving a discounted ticket and reselling it to people who typically buy full-priced tickets.)

Recall: A supply curve tells us the quantity producers are willing and able to supply to the market at each market price. A monopolist [1. does / does not] have a supply curve because the [2] is based upon the slope of the Demand, MR, and MC curves. - There are many possible quantities for each given price. Thus, it is impossible to draw a supply curve. In order to have a supply curve, there has to be a set quantity that is supplied for each given price.

1. does not 2. profit maximizing quantity

Single Price Monopoly VS. 3rd Degree Price Discrimination

3rd Degree Price Discrimination = MORE PROFIT than Single Price Monopoly There are additional (rectangular) profit areas for each demographic that is given a different price. 1. Find the point where the quantity intersects ATC. Then draw a line from that point to the y-axis. All profits (or profit areas) will be ABOVE this line. 2. Find the point on the demand curve that each demographic is willing to pay. 3. The profit from this demographic is the rectangle formed between their specific point on the demand curve and the point where the line in Step 1 intersects the y-axis.

Natural Monopoly

A situation in which LRATC declines continually with increased output. Therefore, a monopoly occurs due to Economies of Scale. So a single firm would be the lowest cost producer of the output demanded. Ex. Water, utilities.

ATC pricing is where...

ATC and Demand intersect. Profits equal zero.

MC pricing is where...

MC and Demand intersect. Profits are less than zero.

Economic Comparisons between Monopoly and PC

P(monop) > P(pc) Q(monop) < P(pc) In the long run... Profit(monop) > Profit(pc) = 0

There is allocative inefficiency in a monopoly because...

P* > MC*. (In other words, MR > MC.)

Comparison between CS, PS, and DWL for Monopoly and Perfect Competition.

PC Market - NO DWL - More consumer surplus than monopoly. - Less producer surplus than monopoly. Monopoly: - DWL - Less consumer surplus than PC. - More producer surplus than PC. Consumer Surplus: PC > M Producer Surplus: PC < M DWL: M > PC = 0

ATC* is the point where...

Q* intersects the ATC curve.

The highest price that consumers are willing to pay is the point where...

Q* intersects the demand curve.

Monopoly Possibilities

SR: profit > 0 or profit < 0 or profit = 0 LR: profit > 0 (most cases) or profit = 0 (if regulated)

When the Demand curve is a straight line, MR ___ the Demand curve.

bisects (The distance between the origin and the MR curve when Q=0 and the distance between the MR curve and the D curve when Q=0 are both equal. In other words, the MR curve evenly splits the distance between the Demand curve and the origin into perfect halves..)

If a natural monopoly is forced to follow a policy of averageminus−cost ​pricing, the monopolist​ will

charge a lower price than if the monopolist were not regulated.

It is impossible to find a supply curve for a monopoly because...

for every given price, the firm can produce the quantity on the MR or Demand curve. Therefore, there is not a single quantity for each price point to form a supply graph.

Under a marginal cost pricing​ rule, a regulated natural monopoly...

incurs an economic loss and there is no deadweight loss.

The profit area...

is the TR area minus the ATC area. (To the left of Q*, above ATC* and below P*.)

The total cost is the area...

to the left of Q* and below ATC*.

The total revenue is the area...

to the left of Q* and below P*.