Monopoly: Price Searcher Weeks 13-14 Chapter 15. 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.

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Presentation transcript:

Monopoly: Price Searcher Weeks Chapter 15

Demand Facing the Firm $Price Qty/T Demand D $

Total Revenue $Price Qty/T Demand D $

Marginal Revenue =Additional Revenue $Price Qty/T Demand D $

Marginal Revenue $Price Qty/T Demand MR D

Marginal Revenue & Elasticity $Price Qty/T Demand MR 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

Price Taker: No Market Power: Many Identical Substitutes $Price Qty/T Demand MC P = MR Qm P = Mc

Monopoly Profit? Qty/T Demand MR MC D Qm Pm AC Profit

Response to Profits New firms enter with similar products Demand declines and becomes more elastic Price falls,output falls and profits decline

Effect of Competition Qty/T D MR MC D Qm Pm AC $P

Monopoly Efficiency Loss ? $Price Qty/T Demand MR MC D Qm Pm Qc? Pc? Efficiency Loss

Sources of Monopoly Natural Monopoly Patents Firm actions –Legal harassment –Exclusive licensing –Bundling

Solutions Government Price regulation Enforcement of Anti-Trust Laws Price Discrimination

Charging different prices for different units sold. Allows firms to increase sales and capture more of consumer surplus.

First Degree: Charging different customers different prices. First Degree: Charging different customers different prices. Auction College scholarships IBM Punch Cards Polariod Camera, Film Ink Jet Printers, Cartridges Swiffer, pads Glllette Razor, Blades

Second 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. Product prices, – medium16 oz. $ 1.09, /oz. – large: 22 oz. $ 1.19, 6 – extra large:32 oz. $1.29, 10 oz. – gulp: 44 oz. $ 1.49, 12 oz. Toothpaste Cereal Coffee

Third Degree: Identify Sub-groups Market BA P PP Q/t MC Pm DMR Qm Pm Pa Pb Qm QbQa Db Da

Necessary Conditions for Successful Price Discrimination Ability to identify and separate buyers by elasticity of demand. Collect different prices from the different buyers Prevent Resale

Third Degree: Third 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 Mail Order Catalogues Freeway Adjacent Restaurant Holiday Brand name mixers Mattresses: Match any advertised price Chinese Menu

Economics of Advertising Primary Economic Function: Lower Search and quality identification costs Higher expenditure on Advertising tends to indicate higher quality Branding is primarily a means of conveying a level of quality Advertising can be used to create a characteristic in a product

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