Unit 4: Imperfect Competition Regulation & Price Discrimination

Memorizing vs. Learning 12-357111-317192-32931 Try memorizing the above number How effective is memorizing it? The point: If you try to MEMORIZE all the graphs of economics you will forget them. You must LEARN them! Trick: The number is made up of the first 12 prime numbers

What do you already know about monopolies? True or False? All monopolies make a profit. Monopolies are usually efficient. All monopolies are bad for the economy. All monopolies are illegal. Monopolies charge the highest price possible The government never prevents monopolies from forming. 3

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Review: Origins of Monopolies Geography is the Barrier to Entry Ex: Nowhere gas stations, De Beers Diamonds, Philadelphia Eagles, Cable TV, Stadium Hot Dogs… -Location or control of resources limits competition and leads to one supplier. 2. The Government is the Barrier to Entry Ex: Water Company, Firefighters, The Army, Pharmaceutical drugs, rubix cubes… -Government allows monopoly for public benefits or to stimulate innovation. -The government issues patents to protect inventors and forbids others from using their invention. (They last 20 years) 5

Review: Origins of Monopolies 3. Technology or Common Use is the Barrier to Entry Ex: Microsoft, Intel, Frisbee, Band-Aid… -Patents and widespread availability of certain products lead to only one major firm controlling a market. 4. Mass Production and Low Costs are Barriers to Entry Ex: Advantage of BIG company vs. small company If there were three competing electric companies they would have higher costs. Having only one electric company keeps prices low -Economies of Scale make it impractical to have smaller firms. Natural Monopoly- It is NATURAL for only one firm to produce because fixed costs are often very high. 6

REVIEW Name That Concept Rules: Cannot use the word(s) Focus on the concept not word Ex: Price Maker

2. Imperfect Competition 3. Barriers to Entry 4. Productive Efficiency Name That Concept 1. Monopoly 2. Imperfect Competition 3. Barriers to Entry 4. Productive Efficiency 5. Dead Weight Loss

5. Allocative Efficiency Name That Concept 1. Marginal Revenue 2. MC = MR 3. Shutdown Rule 4. Natural Monopoly 5. Allocative Efficiency

How much is the TR, TC and Profit or Loss? Conclusion: A monopoly produces where MR=MC, buts charges the set by the demand curve. How much is the TR, TC and Profit or Loss? P $10 9 8 7 6 5 MC ATC Profit =$20 D MR Q 16 17 18 19 20 10

Are Monopolies Efficient??

Monopolies are inefficient because they… Charge a higher price Don’t produce enough Not allocatively efficiency Produce at higher costs Not productively efficiency Have little incentive to innovate Why? Because there is little external pressure to be efficient 12

Monopolies vs. Perfect Competition Where is CS and PS for a monopoly? S = MC P CS Total surplus falls. Now there is DEADWEIGHT LOSS Pm PS D MR Q Qm 13

Regulating Monopolies

Why Regulate? How do they regulate? Why would the government regulate a monopoly? To keep prices lower/fairer To make monopolies efficient How do they regulate? Use Price controls: Price Ceilings Why don’t taxes work? Taxes limit supply and that’s the problem

Where should the government place the price ceiling? 1. Fair-Return Price (Break–Even) P = ATC (Normal Profit) OR 2. Socially Optimal Price P = MC (Allocative Efficiency)

Regulating Monopolies Where does the firm produce if it is UNREGULATED? P MC Pm ATC D MR Q Qm 17

Regulating Monopolies Price Ceiling at Fair Return Fair Return means no economic profit P MC Pm ATC Pso Pfr D MR Q Qm Qso Qfr 18

Regulating Monopolies Price Ceiling at Socially Optimal Socially Optimal = Allocative Efficiency P MC Pm ATC Pso D MR Q Qm Qso 19

Regulating Monopolies Unregulated Socially Optimal P MC Fair Return Pm ATC Pso Pfr D MR Q Qm Qso Qfr 20

Regulating a Natural Monopoly What happens if the government sets a price ceiling to get the socially optimal quantity? P If this causes firm to take a loss, gov’t must subsidize the difference. MC ATC Pso MR D Q Qsocially optimal 21

Price Discrimination

Price Discrimination Definition: Practice of selling the same products to different buyers at different prices Brainstorm several examples of this in the real world…

Price Discrimination Examples: Airline Tickets (vacation vs. business) Movie Theaters (child vs. adult) Member Discounts Senior Discounts HS football games or musicals (students vs. parents) All Coupons (spenders vs. savers)

PRICE DISCRIMINATION Requires the following conditions: Price discrimination seeks to charge each consumer what they are willing to pay in an effort to increase profits. Those willing and able to pay more are charged more Requires the following conditions: Must have monopoly power Must be able to segregate the market Consumers must NOT be able to resell product

P Qd TR MR $11 -

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $10

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $9 2 19 9 $10 $10 $9

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $9 2 19 9 $8 3 27 8 $10 $10 $9 $10 $9 $8

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $9 2 19 9 $8 3 27 8 $7 4 34 7 $10 $10 $9 $10 $9 $8 $10 $9 $8 $7

Results of Price Discrimination Qd TR MR $11 - $10 1 10 $9 2 19 $8 3 27 $7 4 34 $6 5 40 $5 6 45 $4 7 49 $10 $10 $9 $10 $9 $8 $10 $9 $8 $7 $10 $9 $8 $7 $6 $10 $9 $8 $7 $6 $5 $10 $9 $8 $7 $6 $5 $4

WHEN PERFECTLY PRICE DISCIMINATING Qd TR MR $11 - $10 1 10 $9 2 19 $8 3 27 $7 4 34 $6 5 40 $5 6 45 $4 7 49 $10 $10 $9 WHEN PERFECTLY PRICE DISCIMINATING MR = D $10 $9 $8 $10 $9 $8 $7 $10 $9 $8 $7 $6 $10 $9 $8 $7 $6 $5 $10 $9 $8 $7 $6 $5 $4

Price Discriminating Monopoly Regular Monopoly vs. Price Discriminating Monopoly SINGLE PRICE MONOPOLY P MC Pm ATC D MR Q Qm

A perfectly discriminating monopoly can charge each person differently so the MR = D MC ATC D MR Q 34

Identify the Price, Profit, CS, and DWL A perfectly discriminating monopoly can charge each person differently so the MR = D Identify the Price, Profit, CS, and DWL P MC ATC D =MR Q Qnm 35

Identify the Price, Profit, CS, and DWL A perfectly discriminating monopoly can charge each person differently so the MR = D Identify the Price, Profit, CS, and DWL P MC ATC Many prices More profit D =MR Price Discrimination results in multiple prices, more profit, no CS, and if perfect price discrimination… allocative efficiency (socially optimal output) Q Qnm 36

Can You Do The Following? 1. Draw a single-price, unregulated monopoly making a profit and identify price, quantity, and profit. 2. Draw a perfectly competitive industry AND firm at long-run equilibrium 3. Draw a price discriminating monopoly at equilibrium and label price, quantity, MR, and profit