Monopoly Demand Curve The industry and the firm are the same The demand curve is downsloping

Supply Curve

There is no supply curve for a pure monopoly

It is possible for different demand conditions to bring about different prices for the same output

Marginal Revenue

MR is less than P for a monopoly except for the 1st unit

They can increase sales only by charging a lower price

0 1 2 3 4 5 6

$142

132

122

112

102

92

82

Price and Marginal Revenue

Marginal Revenue is Less Than Price

D

• A Monopolist isSelling 3 Units at$142

• To Sell More (4), Price Must BeLowered to $132

• All Customers Must Pay the SamePrice

• TR Increases $132 Minus $30 (3x$10)

Gain = $132

Loss = $30

Price Maker

The monopolist sets the price of its product by controlling the supply

They will set prices in the elastic range of demand (TR test---as price declines, TR increases)

Profit Maximization

MR = MC rule still applies Draw a vertical line up from where MR =

MC to the D curve to find P

Profit Maximization

0

$200

175

150

125

25

100

75

50Pri

ce, C

ost

s, a

nd

Rev

enu

e

1 2 3 4 5 6 7 8 9 10

Quantity

D

MR

ATC

MC

MR=MC

Pm=$122

A=$94

EconomicProfit

Loss Minimization

0

Pri

ce, C

ost

s, a

nd

Rev

enu

e

Quantity

By A Pure Monopolist

D

MR

ATC

MC

MR=MC

Loss

AVCPm

Qm

V

A

Economic Effects of MonopolyPrice, Output, and Efficiency

PurelyCompetitive

Market

PureMonopoly

D D

S=MC MC

P=MC=Minimum

ATC

MR

Pc

Qc

Pc

Pm

QcQm

Pure Competition is EfficientMonopoly P is >MC

And Is Inefficient- make too little at too high a cost

a

b

c

Misconceptions About Monopolies 1. Not highest price- seek maximum

profit, not price. Some high prices would reduce sales and total revenue

2. Seek maximum total profit not unit profit

3. Possibility of loss- monopolies are not immune to escalating resource costs or changing tastes

X inefficiency When a firm produces output at a level

higher than the lowest possible cost of producing

Reasons: 1. Poorly motivated workers Bad management- looking to expand

their power, nepotism etc***competitive firms avoid x inefficiency

because of competition

Rent-Seeking Behavior

Any activity designed to transfer income or wealth to a particular firm or resource supplier at someone else’s or even society’s expense- increases costs without making a better product

Problems with Monopolies 1. Charge higher than competitive prices 2. Stifle innovation 3. Engage in rent-seeking behavior 4. X inefficiency

Government Actions

1. if the monopoly is obtained through anti-competitive means, the government can apply anti-trust laws

2. Regulate prices 3. Can ignore it if the monopoly appears

short-lived

Price Discrimination

The practice of selling a specific product at more than one price when the price differences are not justified by cost differences

3 Types of Price Discrimination 1. Charging each customer in a single

market the maximum price he is willing to pay

2. Charging each customer one price for the first set of units purchased and a lower price for the subsequent units purchased

3. Charging some customers one price and other customers another price

Conditions for Price Discrimination 1. Monopoly Power 2. Market segregation- separate buyers

into different classes 3. No resale

Examples of Price Discrimination 1. Golf and movie theatres- different age

and time costs (seniors, weekend)- more expensive on the weekend

2. Airlines charge higher rates on big business travel days

Figure 8a: Price Discrimination

30

E ATC

80

$120

DMR

MC

(a)

Number of Round-trip Tickets

Dollars per Ticket

Figure 8b: Price Discrimination

30

Dollars per Ticket

120

DMR

MC

10

$160

Additional profit from price discrimination

Number of Round-trip Tickets

(b)

Figure 8c: Price Discrimination

Number of Round-trip Tickets

Dollars per Ticket

$120

DMR

MC

30

100

40

FG

H

Additional profit from price discrimination

(c)

Using the Theory: Price Discrimination at Colleges and Universities Most colleges and universities give some kind of

financial aid to a large proportion of their students Financial aid has been used as an effective

method of price discrimination Designed to increase revenue of the college

Colleges have long been in an especially good position to benefit from price discrimination, because they satisfy all three requirements Face downward-sloping demand curves Able to identify consumers willing to pay more Able to prevent low-price customers from reselling to

high-price customers

Socially Optimal Price

P = MC Regulated price set as a price ceiling

(maximum cost)

Fair Return Cost

P = ATC At times the socially acceptable cost

causes the firm to “lose” Governments can subsidize the

difference or allow the firm to charge enough to have “fair returns”

Regulated Monopoly

Perfectly Discriminating Monopoly Unregulated Perfectly

Discriminating