Presentation on theme: "Monopolistic Competition, Price Discrimination"— Presentation transcript:
1 Monopolistic Competition, Price Discrimination Brandon Chang, Thomas Chang
2 Monopolistic Competition CharacteristicsMarket structure where there are large number of sellers.Sells slightly differentiated products.Has some price setting powerVery low entry barrier to marketAllocatively and productively inefficient
3 Monopolistic Competition in the Long Run Firms in monopolistic competition cannot make economic profit in the long run.
4 Short Run Short run similar to monopoly market Demand is downward slopingMarginal Revenue is below demand curveSlopes down twice as steeply
5 Long Run Caused by low entry barrier to market When firms make economic profit other firms joinThe demand and marginal revenue decreases and flattens outNo economic profitNew Demand is tangent to the ATC curve
6 Economic LossOnce firms start facing economic losses, they can simply leave the market.This increases the demand for other firms inside the market.
7 Efficiency Productively inefficient - Not producing at a quantity where average total cost is lowestFirms are not using their resources in the least cost manner.Allocatively inefficient- The demand curve (marginal benefit) is not equal to marginal costFirms are restricting their output to make profitProducing at less than socially optimal quantity
8 Definition Price Discrimination: A business sells the same good to customers at different pricesThe cost to manufacture the product is the same
9 Chang AirlinesChang Airlines has two types of customers, business travelers willing to pay at most $550 per ticket and students willing to pay at most $150 per ticket. There are 2,000 of each kind of customer. Chang Airlines has constant marginal cost of $125 per seat. If Air Sunshine could charge these two types of customers different prices, it would maximize its profit by charging business travelers $550 and students $150 per ticket. It would capture all of the consumer surplus as profit.
10 Chang AirlinesPanel (a) shows a monopolist that charges two different prices; its profit is shown by the shaded area. Panel (b) shows a monopolist that charges three different prices; its profit, too, is shown by the shaded area. It is able to capture more of the consumer surplus and to increase its profit. That is, by increasing the number of different prices charged, the monopolist captures more of the consumer surplus and makes a larger profit.
12 Requirements for Price Discrimination Price discrimination is not possible when a good is sold in a competitive market since there are many firms all selling at the market price. In order to price discriminate, the firm must have some market power.For a firm to price discriminate, it must have some market powerMonopoly, Oligopoly, Monopolistic Competition (not Perfect Competition)For a firm to price discriminate, it must know the consumers’ willingness to pay
13 Effects of Price Discrimination Two important effects of price discrimination:It can increase the monopolist’s profits.It can reduce deadweight loss.
18 Deadweight LossBecause a monopoly sets its price above marginal cost, it places a wedge between the consumer’s willingness to pay and the producer’s cost.This wedge causes the quantity sold to fall short of the social optimum.
19 Examples of Price Discrimination Movie tickets Airline prices Discount couponsFinancial aidQuantity discounts
20 Multiple Choice: Q. 11. Which of the following is a characteristic of a monopolistic competition?A standardized productMany sellersBarrier to entryPositive long-run profitsA perfectly elastic demand curve
22 Multiple Choice: Q. 2Which of the following results is possible for a monopolistic competitor in the short run?I. positive economic profitII. Normal profitIII. LossI onlyII onlyIII onlyI and II onlyI, II, III
24 Multiple Choice: Q. 3Which of the following results is possible for a monopolistic competitor in the short run?I. positive economic profitII. Normal profitIII. LossI onlyII onlyIII onlyI and II onlyI, II, III
26 Multiple Choice: Q. 4The long-run outcome in a monopolistically competitive industry results inInefficiency because firms earn positive economic profitsEfficiency due to excess capacityInefficiency due to product diversityEfficiency because price exceeds marginal costA trade-off between higher average total cost and more product diversity
28 Multiple Choice: Q. 51. Which of the following characteristics is necessary in order for a firm to price discriminate? a. free entry and exit b. differentiated product c. many sellers d. some control over price e. horizontal demand curve
30 Multiple Choice: Q. 62. Price discrimination a. is the opposite of volume discounts. b. is a practice limited to movie theaters and the airline industry. c. can lead to increased efficiency in the market. d. rarely occurs in the real world. e. helps to increase the profits of perfect competitors.
32 Multiple Choice: Q. 73. With perfect price discrimination, consumer surplus a. is maximized. b. equals zero. c. is increased. d. cannot be determined. e. is the area below the demand curve above MC.
34 Multiple Choice: Q. 84. A price discriminating monopolist will charge a higher price to consumers with a. a more inelastic demand. b. a less inelastic demand. c. higher income. d. lower willingness to pay. e. less experience in the market.
36 True or False: Q. 1A single-price monopolist sells to some customers that would not find the product affordable if purchasing from a price-discriminating monopolist.
37 True or False: Q. 1FALSEThe opposite is true. A price-discriminating monopolist will sell to some customers that would not find the product affordable if purchasing from a single-price monopolist—namely, customers with a high price elasticity of demand who are willing to pay only a relatively low price for the good.
38 True or False: Q. 2A price-discriminating monopolist creates more inefficiency than a single-price monopolist because it captures more of the consumer surplus.
39 True or False: Q. 2FALSEAlthough a price-discriminating monopolist does indeed capture more of the consumer surplus, less inefficiency is created: more mutually beneficial transactions occur because the monopolist makes more sales to customers with a low willingness to pay for the good.
40 True or False: Q. 3Under price discrimination, a customer with highly elastic demand will pay a lower price than a customer with inelastic demand.
41 True or False: Q. 3TRUEUnder price discrimination consumers are charged prices that depend on their price elasticity of demand. A consumer with highly elastic demand will pay a lower price than a consumer with inelastic demand.
42 Skill Testing Question Which of the following are cases of price discrimination and which are not? In the cases of price discrimination, identify the consumers with high price elasticity of demand and those with low price elasticity of demand. a. Damaged merchandise is marked down. b. Restaurants have senior citizen discounts. c. Food manufacturers place discount coupons for their merchandise in newspapers. d. Airline tickets cost more during the summer peak flying season.2.a.This is not a case of price discrimination because the product itself is different and all consumers, regardless of their price elasticities of demand, value the damaged merchandise less than undamaged merchandise. So the price must be lowered to sell the merchandise.b.This is a case of price discrimination. Senior citizens have a higher price elasticity of demand for restaurant meals (their demand for restaurant meals is more responsive to price changes) than other patrons. Restaurants lower the price to high-elasticity consumers (senior citizens). Consumers with low price elasticity of demand will pay the full price.c.This is a case of price discrimination. Consumers with a high price elasticity of demand will pay a lower price by collecting and using discount coupons. Consumers with a low price elasticity of demand will not use coupons.d.This is not a case of price discrimination; it is simply a case of supply and demand.