1. Perfect competition vis-à-vis monopolies
A Brief Summary of what we know

2. PC: In the long-run In the long run,
the firm will make only normal (accounting) profit (zero economic profit).
Its horizontal demand curve will touch its average total cost curve at its lowest point

3. The Monopolist’s Profit
Image: Animated Figure 10.3
Lecture notes:
Remember that the demand function represents willingness to pay (WTP) of consumers. At the quantity q, the monopolist charges a price equal to the height of the demand, or equal to the WTP of the consumers at that quantity.
Recall the area of a rectangle is length * height.
Here, the length of the green profit rectangle is the number of units the monopoly sells.
The height of the rectangle is average profit per unit.
Thus, we get the following formula from the graph:
Total profit = (number of units sold) * (average profit per unit)

4. Deadweight Loss of Monopoly
Image: Animated Figure 10.5
Lecture notes:
From text:
The monopolist charges too high a price and produces too little of the product, so some consumers who would benefit from a competitive market lose out. Since the demand curve, or the willingness to pay, is greater than the marginal cost between output levels QM and QC, society would be better off if output was expanded to QC. But a profit-maximizing monopolist will limit output to QM. The result, a deadweight loss equal to the area of the yellow triangle, is inefficient for society.

5. The Problems with Monopoly
Monopolies can make societies worse off
Restricting output and charging higher prices compared to competitive markets
Operate inefficiently (deadweight loss). This is referred to as market failure.
Less choices for consumers
Unhealthy competition called “rent seeking”
Lecture notes:
The word “monopoly” often has a negative connotation. With a bad economy, we often hear people complaining about “greedy companies,” “Wall Street,” “banks”, etc.
However, these entities are often not monopolies. Monopolies are often economically inefficient. This comes from the fact that P > MC and that output is restricted compared to competitive markets.

6. And then there’s price discrimination
Price Discrimination – Different ways of extracting Consumer’s Surplus
Charging Same Customer Different Price for Each Unit of the Good
Extracts Consumer Surplus from single price for all units
Requires firm to know each customer’s demand curve
Need to prevent resale
Easier for food than for durable items
Easier before eBay

7. And then there’s price discrimination
Price Discrimination – Different ways of extracting Consumer’s Surplus
Charging Different Customers Different Price for Same Good
Extracts Consumer Surplus from single price for all units
Requires firm to know each customer’s demand curve
Need to prevent resale
Geographic separation – e.g., Madison Park gas station

8. Measuring consumer surplus with the demand curve2
Measuring consumer surplus with the demand curve
(a) Price = $80
(b) Price = $70
$100 80 70 50
Price of
Albums
$100 80 70 50
Price of
Albums
Demand
Demand
John’s consumer
surplus ($30)
John’s consumer
surplus ($20)
Paul’s consumer
surplus ($10)
Total consumer
surplus ($40) 4 3 1 2
Quantity of Albums 4 3 1 2
Quantity of Albums
In panel (a), the price of the good is $80, and the consumer surplus is $20. In panel (b), the price of the good is $70, and the consumer surplus is $40.

9. Price Discrimination Lessons from perfect price discrimination
Rational strategy
Increase profit
Charges each customer a price closer to his or her willingness to pay
Sell more than is possible with a single price

10. Second-Degree Price Discrimination
Second-degree price discrimination occurs when firms sell their product at a discount when consumers buy large quantities.
Example: Electricity prices?
Costco/Sam’s Club – “Big Box Stores”
k=second-degree+price+discrimination

11. Third-Degree Price Discrimination
Under third-degree price discrimination, a firm charges different prices in different markets for their product.
The most common form of price discrimination
Examples include:
Children's discounts
Senior citizen’s discounts
Airfares
Different geographic markets (Madison Park, U District)

12. More Complex Monopoly Pricing Schemes
Classic categorization of monopolies
3 levels of price discrimination
First degree (Perfect Price Discrimination)
Extract almost all of the Consumer Surplus
Able to get a different price for each unit sold
Moves consumer along the Demand Curve
Second degree
Provide quantity discounts; but have to buy in blocks, with each larger block having a lower price than the last
Third degree
Different prices for same good in different markets
In all cases, it is necessary to prevent resale and new entrants

13. Third Degree Price Discrimination
Choose Qs based
MR = MC for market demand
Set price for each segment
Equating MC(market) to MR for each segment
Setting price for Qs (segment)
Zone pricing
Gas stations?
Grocery stores?
Senior citizen discounts?

14. Third Degree Price Discrimination
Setting separate prices in each market

15. To Be Able to Do Price Discrimination
To be a successful price discriminator, a seller must satisfy three conditions:
(1) to have market control and be a price maker,
(2) to identify two or more groups that are willing to pay different prices, and
(3) to keep the buyers in one group from reselling the good to another group.

16. A Word from the FTC on Discriminatory Pricing
A seller charging competing buyers different prices for the same "commodity" or discriminating in the provision of "allowances" -- compensation for advertising and other services -- may be violating the Robinson-Patman Act. This kind of price discrimination may hurt competition by giving favored customers an edge in the market that has nothing to do with the superior efficiency of those customers. However, price discriminations generally are lawful, particularly if they reflect the different costs of dealing with different buyers or result from a seller’s attempts to meet a competitor’s prices or services.