ECON 160

Week 13

Monopoly: Price Searcher

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

Total Revenue $Price

Qty/T

Demand

D

$10 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7

Marginal Revenue =Additional Revenue $Price

Qty/T

Demand

D

$10 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7

Marginal Revenue $Price

Qty/T

Demand

MR

D

$ P x

$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1

1 2 3 4 5 6 7 8 9 10

Demand x

Qtyx /T

Marginal Revenue & Elasticity of Demand

Ed > 1

Ed < 1

Ed = 1

Marginal Revenue

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?Monopoly Profit?

Qty/T

Demand

MR

MC

D

Qm

PmACProfit

Response to ProfitsResponse to Profits

• New firms enter with similar products

• Demand declines and becomes more elastic

• Price falls, output falls and profits decline

Effect of CompetitionEffect of Competition

Qty/T

D

MR

MC

D

Qm

PmAC

$P

Monopoly Efficiency Loss ?Monopoly Efficiency Loss ?$Price

Qty/T

Demand

MR

MC

D

Qm

Pm

Qc?

Pc?

Sources of Monopoly

• Natural Monopoly

• Patents

• Firm actions– Legal harassment– Exclusive licensing– Bundling

SolutionsSolutions

• Government Price regulation

• Enforcement of Anti-Trust Laws

• Price Discrimination

Price DiscriminationPrice Discrimination

• Charging different prices for different units sold.

• Allows firms to increase sales and capture more of consumer surplus.

Monopoly Pricing: Single Price

$ Price

Qty/T

Demand

Marginal Cost

MR

Pm

Qm

First Degree: Charging different customers different prices. (i.e. moving down the demand curve)

• Auction

Monopoly Pricing: First Degree

$ Price

Qty/T

Demand

Marginal Cost

P1

Q1

P2P3P4P5P6

Q2 Q4Q3 Q6Q5

First Degree: Charging different customers different prices. (i.e. moving down the demand curve)

• Auction• College scholarships

First Degree: Different Prices for different buyers

$ Price

Qty/T

Demand

Marginal Cost

MR

Tuition

Qm

Scholarship Amount

First Degree: Charging different customers different prices. (i.e. moving down the demand curve)

• Auction• College scholarships• IBM Punch Cards• Polaroid Camera & Film• Xerox copier & Toner• Ink Jet Printers & Cartridges• Razor handle & Blades• Swiffer handle & Pads• Glade Plugins & refills

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.• Family Gym membership• Product prices, (Drinks, coffee, cereal, toothpaste)

– medium16 oz. $ 1.09, .07/oz.– large: 22 oz. $ 1.19, extra 6 oz. @ .02/oz.– extra large:32 oz. $1.29, extra 10 oz. @ .01/ oz.

Third Degree: Charging different prices to different groups according to different elasticity

of Demand.

Third Degree: Identify Sub-groups

Market BA P P P

Q/tQ/tQ/t

MC

Pm

DMR

Qm

Pm Pm

Pa

Pb

QmQm QbQa

Db

Da

Third Degree: Charging different prices to different groups according to different elasticity of Demand.

• Grocery coupons• Theaters• Airlines & Hotels• Newly released unique products (Segway)• Prescription drugs in different countries.• Brand name mixers (Holiday Sale)• Mattresses: Match any advertised price• Menu (Freeway)• Menu (Chinese)

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