Monopoly n One firm only in a market n Persistence of such a monopoly: – huge cost advantage – secret technology (Coca-Cola) or patent – government restrictions to entry (deliveries of letters in Germany) n But what is a market?

p

The demand function: how many units of a good do consumers buy? n price n properties n availability of substitutes n quality n information n compatibility n timely delivery n...

Demand analysis for X=f(p, m,...) n Satiation quantity = f(0, m,...) n Prohibitive price = price p such that f(p, m,... ) =0 n Slope of demand curve dX/dp n Price elasticity of demand n...

Demand analysis for X(p) = d - ep n Satiation quantity: n Prohibitive price: n Slope of demand curve: n Price elasticity of demand

p 1 e

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Revenue, costs and profits n Revenue: n Cost: n Profit: n Linear case:

When a firm increases the price by one unit, Marginal revenue with respect to price n revenue goes up by X (for every unit sold, the firm receives one Euro), n but goes down by p dX/dp (the price increase diminishes demand and revenue).

Marginal revenue w.r.t. price and price elasticity of demand marginal revenue w.r.t. price is zero when a relative price increase is matched by a relative quantity decrease of equal magnitude

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Can a demand elasticity < 1 be optimal?

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For comparisons, units of measurement have to be the same! Unities of measurement n length: units of distance (e.g., kilometers) n velocity: units of distance per unit of time (e.g. miles per hour) n quantity X: units of quantity (e.g. pieces) n price p: units of money per unit of quantity (e.g. DMs per piece) n revenue R: units of money (e.g. Euros)

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n Profit function: n Setting the derivative of the profit function with respect to the price equal to 0: How to find the monopolist`s profit maximizing price

When a firm increases the price by one unit, the costs of production go down: Marginal cost with respect to price n the price increase diminishes demand, n the demand decrease diminishes costs.

Consider a monopoly selling at a single market. The demand and the cost function are given by a) Demand elasticity? Marginal-revenue function with respect to price? b) Profit maximizing price? c) How does an increase of unit costs influence the optimal price? (Consequence for tax on petrol?) (Industrial Organization; Oz Shy) Exercise (monopoly in the linear case)

Consider a monopoly selling at a single market. The demand and the cost functions are given by a) Demand elasticity? Marginal-revenue function with respect to price? b) Price charged with respect to  ? c) What happens to the monopoly’s price when  increases? Interpret your result. (Industrial Organization; Oz Shy) Exercise (monopoly with constant elasticity)

Price discrimination n First degree price discrimination: – Every consumer pays a different price which is equal to his or her willingness to pay. n Second degree price discrimination: – Prices differ according to the quantity demanded and sold (quantity rebate). n Third degree price discrimination: – Consumer groups (students, children,...) are treated differently.

Exercise (third degree price discrimination) n A monopolist faces two markets: x 1 (p 1 )=100-p 1 x 2 (p 2 )=100-2p 2. Unit costs are constant at $20. n Profit-maximizing prices with and without price discrimination? (Intermediate Microeconomics; Hal R. Varian)

Exercises (inverse elasticities rule) n Demand elasticities in two markets: n Suppose that a monopoly can price discriminate between the two markets. n Prove the following statement: “The price in market 1 will be 50% higher than the price in market 2.“ (Industrial Organization; Oz Shy)

Antitrust laws and enforcement, Germany n laws – Gesetz gegen unlauteren Wettbewerb (1896) – Gesetz gegen Wettbewerbsbeschränkungen (GWB), (1957) n enforcement – Bundeskartellamt

Preisdiskriminierung n Laut GWB liegt bei – marktbeherrschenden Unternehmen n 1 Unternehmen mit 1/3 Marktanteil, n 2 oder 3 Unternehmen mit 1/2 Marktanteil, n 4 oder 5 Unternehmen mit 2/3 Marktanteil – missbräuchliche Ausnutzung der marktbe- herrschenden Stellung vor, wenn ohne sachliche Rechtfertigung unterschiedliche Entgelte gefordert werden.

Equilibria and comparative statics comparative staticsequilibria  markets:  price which equalises supply and demand  game theory:  Nash equilibrium  comparative:  comparison of equilibria with different parameters  static:  no dynamics  no adjustment processes = subjects have no reason to change their actions  households:  utility maximizing bundle  monopoly:  profit maximizing price

Parameters and variables n exogenous parameters: – describe the economic situation (input of economic models) – e.g. preferences from households n endogenous variables: – are the output of economic models (after using the equilibrium-concept) – e.g. profit maximizing price

Complements and substitutes n Goods are called substitutes if a price increase of one increases demand for the other (butter and margarine, petrol and train tickets). n Goods are called complements if a price increase of one decreases demand for the other (hardware and software, cars and gas, cinema and popcorn).

Executive summary I n A profit-maximizing monopolist always sets the price in the elastic region of the demand curve. n For linear demand, we have – The higher the marginal costs (c) the higher the monopoly price and the lower monopoly quantity and profit. – Increasing the demand at any price (e.g. increasing d or decreasing e) increases monopoly price, quantity, and profit.

Executive summary I (continued) n For demand with constant price elasticity, we have – The higher the marginal costs (c) the higher the monopoly price and the lower monopoly quantity and profit. – Increasing the demand at any price (i.e. increasing a) does not change the monopoly price, but increases monopoly quantity and profit.

Executive summary II n If a monopolist offers more than one good, he has to charge a higher/lower price for substitutes/complements than a single-product monopolist would do. n A firm that offers durable goods should set a price which is above the optimal short-run price. n In order to exhaust effects of experience and learning curves a price below the optimal short-run price should be charged.

This is a firm‘s ideal world: Executive summary III n There are no competitors in the output market and the firm uses price differentiation as perfect as possible. n The firm is a monopsonist on the input markets and uses factor price discrimination. n Entry is blockaded. Thus, the firm is not threatened by potential competitors. n There is no threat of substitutes.