1. 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?

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4. 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...

5. 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...

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

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

10. 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). When a firm increases the price by one unit,

11. 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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13. Can a demand elasticity < 1 be optimal?

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15. 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) For comparisons, units of measurement have to be the same!

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

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

19. 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)

20. 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)

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

22. 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)

23. 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)

24. 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

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

26. 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).

27. Executive summary I n A profit-maximizing monopolist always sets the price in the elastic region of the demand curve. n The higher the marginal cost and the higher the demand at each price, the higer the monopoly price. n The lower the marginal cost and the higher the demand at each price, the higher the profit and the monopoly quantity.

28. 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.

29. 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. This is a firm‘s ideal world: