1. Unit 4 PPT 2 Regulation and Price Discrimination

2. Are Monopolies Efficient?

3. Because there is little external pressure to be efficient
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 3

4. 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 4

5. Regulating Monopolies

6. Why Regulate? How do they regulate?
Why would the government regulate an monopoly?
To keep prices low
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

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

8. Regulating Monopolies
Where does the firm produce if it is unregulated? P MC Pm
ATC D MR Q Qm 8

9. Regulating Monopolies
Price Ceiling at Socially Optimal
Socially Optimal = Allocative Efficiency P MC Pm
ATC
Pso D MR Q Qm
Qso 9

10. 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 10

11. Regulating Monopolies
Unregulated
Socially Optimal P MC
Fair Return Pm
ATC
Pso
Pfr D MR Q Qm
Qso
Qfr 11

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

13. Price Discrimination

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

15. 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 with inelastic demand are charged more than those with elastic
Requires the following conditions:
Must have monopoly power
Must be able to segregate the market
Consumers must NOT be able to resell product

16. P Qd TR MR
$11 -

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

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

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

20. 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

21. 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

22. WHEN 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 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

23. Price Discriminating Monopoly
Regular Monopoly vs.
Price Discriminating Monopoly P MC Pm
ATC D MR Q Qm

24. A perfectly discriminating can charge each person differently so the Marginal Revenue = DemandMC
ATC D MR Q 24

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

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

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