1. Unit 4: Imperfect Competition Regulation & Price Discrimination

2. Memorizing vs. Learning
Try memorizing the above number
How effective is memorizing it?
The point: If you try to MEMORIZE all the graphs of economics you will forget them. You must LEARN them!
Trick: The number is made up of the first 12 prime numbers

3. What do you already know about monopolies?
True or False?
All monopolies make a profit.
Monopolies are usually efficient.
All monopolies are bad for the economy.
All monopolies are illegal.
Monopolies charge the highest price possible
The government never prevents monopolies from forming. 3

4. 4

5. Review: Origins of Monopolies
Geography is the Barrier to Entry
Ex: Nowhere gas stations, De Beers Diamonds, Philadelphia Eagles, Cable TV, Stadium Hot Dogs…
-Location or control of resources limits competition and leads to one supplier.
2. The Government is the Barrier to Entry
Ex: Water Company, Firefighters, The Army, Pharmaceutical drugs, rubix cubes…
-Government allows monopoly for public benefits or to stimulate innovation.
-The government issues patents to protect inventors and forbids others from using their invention. (They last 20 years) 5

6. Review: Origins of Monopolies
3. Technology or Common Use is the Barrier to Entry
Ex: Microsoft, Intel, Frisbee, Band-Aid…
-Patents and widespread availability of certain products lead to only one major firm controlling a market.
4. Mass Production and Low Costs are Barriers to Entry
Ex: Advantage of BIG company vs. small company
If there were three competing electric companies they would have higher costs.
Having only one electric company keeps prices low
-Economies of Scale make it impractical to have smaller firms.
Natural Monopoly- It is NATURAL for only one firm to produce because fixed costs are often very high. 6

7. REVIEW Name That Concept Rules: Cannot use the word(s)
Focus on the concept not word
Ex: Price Maker

8. 2. Imperfect Competition 3. Barriers to Entry 4. Productive Efficiency
Name That Concept
1. Monopoly
2. Imperfect Competition
3. Barriers to Entry
4. Productive Efficiency
5. Dead Weight Loss

9. 5. Allocative Efficiency
Name That Concept
1. Marginal Revenue
2. MC = MR
3. Shutdown Rule
4. Natural Monopoly
5. Allocative Efficiency

10. How much is the TR, TC and Profit or Loss?
Conclusion: A monopoly produces where MR=MC, buts charges the set by the demand curve.
How much is the TR, TC and Profit or Loss? P
$10 9 8 7 6 5 MC
ATC
Profit =$20 D MR Q 10

11. Are Monopolies Efficient??

12. Monopolies are inefficient because they…
Charge a higher price
Don’t produce enough
Not allocatively efficiency
Produce at higher costs
Not productively efficiency
Have little incentive to innovate
Why? Because there is little external pressure to be efficient 12

13. Monopolies vs. Perfect Competition
Where is CS and PS for a monopoly?
S = MC P CS
Total surplus falls.
Now there is DEADWEIGHT LOSS Pm PS D MR Q Qm 13

14. Regulating Monopolies

15. Why Regulate? How do they regulate?
Why would the government regulate a monopoly?
To keep prices lower/fairer
To make monopolies efficient
How do they regulate?
Use Price controls: Price Ceilings
Why don’t taxes work?
Taxes limit supply and that’s the problem

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

17. Regulating Monopolies
Where does the firm produce if it is UNREGULATED? P MC Pm
ATC D MR Q Qm 17

18. Regulating Monopolies
Price Ceiling at Fair Return
Fair Return means no economic profit P MC Pm
ATC
Pso
Pfr D MR Q Qm
Qso
Qfr 18

19. Regulating Monopolies
Price Ceiling at Socially Optimal
Socially Optimal = Allocative Efficiency P MC Pm
ATC
Pso D MR Q Qm
Qso 19

20. Regulating Monopolies
Unregulated
Socially Optimal P MC
Fair Return Pm
ATC
Pso
Pfr D MR Q Qm
Qso
Qfr 20

21. Regulating a Natural Monopoly
What happens if the government sets a price ceiling to get the socially optimal quantity? P
If this causes firm to take a loss, gov’t must subsidize the difference. MC
ATC
Pso MR D Q
Qsocially optimal 21

22. Price Discrimination

23. Price Discrimination Definition:
Practice of selling the same products to different buyers at different prices
Brainstorm several examples of this in the real world…

24. Price Discrimination Examples: Airline Tickets (vacation vs. business)
Movie Theaters (child vs. adult)
Member Discounts
Senior Discounts
HS football games or musicals (students vs. parents)
All Coupons (spenders vs. savers)

25. PRICE DISCRIMINATION Requires the following conditions:
Price discrimination seeks to charge each consumer what they are willing to pay in an effort to increase profits.
Those willing and able to pay more are charged more
Requires the following conditions:
Must have monopoly power
Must be able to segregate the market
Consumers must NOT be able to resell product

26. P Qd TR MR
$11 -

27. Results of Price DiscriminationQd TR MR
$11 -
$10 1 10
$10

28. Results of Price DiscriminationQd TR MR
$11 -
$10 1 10 $9 2 19 9
$10
$10 $9

29. Results of Price DiscriminationQd TR MR
$11 -
$10 1 10 $9 2 19 9 $8 3 27 8
$10
$10 $9
$10 $9 $8

30. Results of Price DiscriminationQd TR MR
$11 -
$10 1 10 $9 2 19 9 $8 3 27 8 $7 4 34 7
$10
$10 $9
$10 $9 $8
$10 $9 $8 $7

31. Results of Price DiscriminationQd TR MR
$11 -
$10 1 10 $9 2 19 $8 3 27 $7 4 34 $6 5 40 $5 6 45 $4 7 49
$10
$10 $9
$10 $9 $8
$10 $9 $8 $7
$10 $9 $8 $7 $6
$10 $9 $8 $7 $6 $5
$10 $9 $8 $7 $6 $5 $4

32. WHEN PERFECTLY PRICE DISCIMINATINGQd TR MR
$11 -
$10 1 10 $9 2 19 $8 3 27 $7 4 34 $6 5 40 $5 6 45 $4 7 49
$10
$10 $9
WHEN PERFECTLY PRICE DISCIMINATING
MR = D
$10 $9 $8
$10 $9 $8 $7
$10 $9 $8 $7 $6
$10 $9 $8 $7 $6 $5
$10 $9 $8 $7 $6 $5 $4

33. Price Discriminating Monopoly
Regular Monopoly vs.
Price Discriminating Monopoly
SINGLE PRICE MONOPOLY P MC Pm
ATC D MR Q Qm

34. A perfectly discriminating monopoly can charge each person differently so the MR = DMC
ATC D MR Q 34

35. Identify the Price, Profit, CS, and DWL
A perfectly discriminating monopoly can charge each person differently so the MR = D
Identify the Price, Profit, CS, and DWL P MC
ATC D
=MR Q
Qnm 35

36. Identify the Price, Profit, CS, and DWL
A perfectly discriminating monopoly can charge each person differently so the MR = D
Identify the Price, Profit, CS, and DWL P MC
ATC
Many prices
More profit D
=MR
Price Discrimination results in multiple prices, more profit, no CS, and if perfect price discrimination… allocative efficiency (socially optimal output) Q
Qnm 36

37. Can You Do The Following?
1. Draw a single-price, unregulated monopoly making a profit and identify price, quantity, and profit.
2. Draw a perfectly competitive industry AND firm at long-run equilibrium
3. Draw a price discriminating monopoly at equilibrium and label price, quantity, MR, and profit