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Unit 4 PPT 2 Regulation and Price Discrimination 1.

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Presentation on theme: "Unit 4 PPT 2 Regulation and Price Discrimination 1."— Presentation transcript:

1 Unit 4 PPT 2 Regulation and Price Discrimination 1

2 Are Monopolies Efficient? 2

3 Monopolies are inefficient because they… 1.Charge a higher price 2.Dont produce enough Not allocatively efficiency 3.Produce at higher costs Not productively efficiency 4.Have little incentive to innovate Why? Because there is little external pressure to be efficient 3

4 Where is CS and PS for a monopoly? 4 Monopolies vs. Perfect Competition Q P D S = MC MR PmPm QmQm CS PS Total surplus falls. Now there is DEADWEIGHT LOSS

5 Regulating Monopolies 5

6 How do they regulate? Use Price controls: Price Ceilings Why dont taxes work? Taxes limit supply and thats the problem Why Regulate? Why would the government regulate an monopoly? 1.To keep prices low 2.To make monopolies efficient 6

7 1.Socially Optimal Price P = MC (Allocative Efficiency) Where should the government place the price ceiling? 2. Fair-Return Price (Break–Even) P = ATC (Normal Profit) OR 7

8 D MR MC ATC 8 Q P Regulating Monopolies Where does the firm produce if it is unregulated? PmPm QmQm

9 D MR MC ATC 9 Q P Regulating Monopolies Price Ceiling at Socially Optimal PmPm QmQm P so Q so Socially Optimal = Allocative Efficiency

10 D MR MC ATC 10 Q P Regulating Monopolies Price Ceiling at Fair Return PmPm QmQm P so Q so Fair Return means no economic profit P fr Q fr

11 D MR MC ATC 11 Q P Regulating Monopolies PmPm QmQm P so Q so Unregulated P fr Q fr Socially Optimal Fair Return

12 Q DMR MC ATC P Regulating a Natural Monopoly 12 Q socially optimal What happens if the government sets a price ceiling to get the socially optimal quantity? The firm would make a loss and would require a subsidy P so

13 Price Discrimination 13

14 Price Discrimination Definition: Practice of selling the same products to different buyers at different prices Airline Tickets (vacation vs. business) Movie Theaters (child vs. adult) All Coupons (spenders vs. savers) Examples: 14

15 PRICE DISCRIMINATION Price discrimination seeks to charge each consumer what they are willing to pay in an effort to increase profits. Those with inelastic demand are charged more than those with elastic Requires the following conditions: 1.Must have monopoly power 2.Must be able to segregate the market 3.Consumers must NOT be able to resell product 15

16 PQdTRMR $

17 $10 PQdTRMR $1100- $10110 Results of Price Discrimination 17

18 $10 PQdTRMR $1100- $10110 $92199 $10$9 Results of Price Discrimination 18

19 $10 PQdTRMR $1100- $10110 $92199 $83278 $10$9 $10$9$8 Results of Price Discrimination 19

20 $10 PQdTRMR $1100- $10110 $92199 $83278 $74347 $10$9 $10$9$8 $10$9$8$7 Results of Price Discrimination 20

21 $10 PQdTRMR $1100- $10110 $9219$9 $8327$8 $7434$7 $6540$6 $5645$5 $4749$4 Results of Price Discrimination $10$9 $10$9$8 $10$9$8 $10$9$8$7 $6 $5$10$9$8$7$6 $10$9$8$7$6$5$4 21

22 $10 PQdTRMR $1100- $10110 $9219$9 $8327$8 $7434$7 $6540$6 $5645$5 $4749$4 $10$9 $10$9$8 $10$9$8 $10$9$8$7 $6 $5$10$9$8$7$6 $10$9$8$7$6$5$4 WHEN PRICE DISCIMINATING MR = D 22

23 Regular Monopoly vs. Price Discriminating Monopoly 23 D MR MC ATC Q P PmPm QmQm

24 A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand 24 D MR MC ATC Q P

25 25 D=MR MC ATC Q P Q nm Identify the Price, Profit, CS, and DWL A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand

26 26 D=MR MC ATC Q P Q nm Identify the Price, Profit, CS, and DWL A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand Price Discrimination results in several prices, more profit, no CS, and a higher socially optimal quantity

27 Can You Do The Following? 1.Draw a monopoly making a profit at long-run equilibrium and identify price, quantity, and profit. 2. Draw a perfectly competitive industry AND firm at long-run equilibrium 27


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