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 1 st unit  They can increase sales only by charging a lower price

$ Price and Marginal Revenue Marginal Revenue is Less Than Price D A Monopolist is Selling 3 Units at $142 To Sell More (4), Price Must Be Lowered to $132 All Customers Must Pay the Same Price 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 $ Price, Costs, and Revenue Quantity D MR ATC MC MR=MC P m =$122 A=$94 Economic Profit

Loss Minimization 0 Price, Costs, and Revenue Quantity By A Pure Monopolist D MR ATC MC MR=MC Loss AVC PmPm QmQm V A

Economic Effects of Monopoly Price, Output, and Efficiency Purely Competitive Market Pure Monopoly D D S=MC MC P=MC= Minimum ATC MR PcPc QcQc PcPc PmPm QcQc QmQm Pure Competition is Efficient Monopoly 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 D MR MC (a) Number of Round-trip Tickets Dollars per Ticket

Figure 8b: Price Discrimination 30 Dollars per Ticket 120 D MR 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 D MR MC F G 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