Monopoly: Price Searcher

Weeks 13-14

Chapter 15

Demand Facing the Firm$Price

Qty/T

Demand

D

$10 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8

Total Revenue $Price

Qty/T

Demand

D

$10 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7

Marginal Revenue =Additional Revenue $Price

Qty/T

Demand

D

$10 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7

Marginal Revenue $Price

Qty/T

Demand

MR

D

Marginal Revenue & Elasticity$Price

Qty/T

Demand

MR

Ed > 1

Ed < 1

Ed = 1

Monopoly Output$Price

Qty/T

Demand

MR

MC

D

Qm

Pm

Mc

Market Power: No Close Substitutes$Price

Qty/T

Demand

MR

MC

D

Qm

Pm

Mc

Market Power: Few Close Substitutes$Price

Qty/T

Demand

MR

MC

D

Qm

Pm

Mc

Market Power: Many Close Substitutes$Price

Qty/T

Demand

MR

MC

D

Qm

Pm

Mc

Price Taker: No Market Power: Many Identical Substitutes

$Price

Qty/T

Demand

MC

P = MR

Qm

P = Mc

Monopoly Profit?Monopoly Profit?

Qty/T

Demand

MR

MC

D

Qm

PmACProfit

Response to ProfitsResponse to Profits

• New firms enter with similar products

• Demand declines and becomes more elastic

• Price falls,output falls and profits decline

Effect of Competition

Qty/T

D

MR

MC

D

Qm

PmAC

$P

Monopoly Efficiency Loss ?Monopoly Efficiency Loss ?$Price

Qty/T

Demand

MR

MC

D

Qm

Pm

Qc?

Pc?

Efficiency Loss

Sources of MonopolySources of Monopoly

• Natural Monopoly

• Patents

• Firm actions– Legal harassment– Exclusive licensing– Bundling

SolutionsSolutions

• Government Price regulation

• Enforcement of Anti-Trust Laws

• Price Discrimination

Price DiscriminationPrice Discrimination

• Charging different prices for different units sold.

• Allows firms to increase sales and capture more of consumer surplus.

First DegreeFirst Degree: Charging different : Charging different customers different prices.customers different prices.

• Auction

• College scholarships

• IBM Punch Cards

• Polariod Camera, Film

• Ink Jet Printers, Cartridges

• Swiffer, pads

• Glllette Razor, Blades

Second Degree: (Quantity Forcing) • Offering a schedule of prices to all buyers, which

successively lowers the price for additional units, purchased (Moving down each buyers individual demand)

• Tires: Buy 3, get 4th free.• Product prices,

– medium16 oz. $ 1.09, .068125/oz.– large: 22 oz. $ 1.19, 6 oz. @ .0167/oz.– extra large:32 oz. $1.29, 10 oz. @ .01/ oz.– gulp: 44 oz. $ 1.49, 12 oz. @ .0167/ oz.

• Toothpaste• Cereal• Coffee

Third Degree: Identify Sub-groups

Market BA P P P

Q/tQ/tQ/t

MC

Pm

DMR

Qm

Pm Pm

Pa

Pb

QmQm QbQa

Db

Da

Necessary Conditions for Successful Price Discrimination

• Ability to identify and separate buyers by elasticity of demand.

• Collect different prices from the different buyers

• Prevent Resale

Third DegreeThird Degree:: Charging different prices to different

groups according to different elasticity of Demand. • Grocery coupons• Prescription drugs in different countries.• Doctors medical services• Newly released unique products • Movies• Mail Order Catalogues• Freeway Adjacent Restaurant• Holiday Brand name mixers• Mattresses: Match any advertised price• Chinese Menu

Economics of Advertising

• Primary Economic Function: Lower Search and quality identification costs

• Higher expenditure on Advertising tends to indicate higher quality

• Branding is primarily a means of conveying a level of quality

• Advertising can be used to create a characteristic in a product