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Week 9

 Price discrimination
o Using different prices for different people
o To be able to price discriminate, a firm must identify and separate different types
of buyers, sell a product that cannot be resold
o Examples: airline tickets, concert
 Perfect price discrimination
o Extracts the entire consumer surplus by charging the highest price that consumers
are willing to pay for each unit (ex., charging food per bite)
 Monopoly
o Only one firm in industry
o No close substitutes for the good firm produces
o Some reason why entry and survival of a competing firm is unlikely
o In the world of economics, there are no identical products (location matters)
o Sources of monopoly power
 Barriers to entry
 Legal restrictions: a legal barrier to entry creates a legal monopoly
 Control of a scarce resource or input: if a good is produced with a
rare input, a co. that gains control of that input can establish a
 Deliberately erected entry barriers: an incumbent firm can make it
difficult for potential rivals to enter
 Large fixed costs: entry into an industry is risky if it requires a
large sunk. Most important type of naturally imposed barrier to
 Cost advantages
 Technical superiority
 Economics of scale (natural monopoly): is an industry where
advantages of large scale production makes it possible for a single
firm to serve entire market output at a lower AC than a larger
number of firms producing smaller Q
o Monopoly vs competition: demand curve
 In a competitive market, the market demand curve slopes downward, but
the demand curve for any individual firm’s product is horizontal at the
market price.
 A monopolist is the only seller, so it faces the market demand curve. To
sell a larger Q, the firm must reduce P. Thus, MR does not equal P.
o Monopoly price-setting strategies
 A monopoly faces a tradeoff between price and the quantity sold
 To sell a largest quantity, the monopolist must set a lower price
 There are two price-setting possibilities that create different tradeoffs:
 Single price
 Price discrimination
o Single price
 Price and marginal revenue: because in a monopoly there is only one firm,
the firm’s demand curve is the market demand curve
 Total revenue, the price multiplied by quantity sold
o Understanding the monopolist’s MR
 Increasing Q has two effects on revenue:
 Output effect: higher output raises revenue
 Price effect: lower price reduces revenue
 To sell a largest Q, the monopolist must reduce the price on all the units it
 Hence, MR < P
 MR could even be negative if the price effect exceeds the output effect
o Profit maximization
 Like a competitive firm, a monopolist maximizes profit by producing the
quantity where MR = MC
 Once the monopolist identifies this quantity, it sets the highest price
consumers are willing to pay for that Q
 It finds this price form the D curve
 As with a competitive firm, the monopolist’s profit equals (P-ATC) x Q
o A monopoly does not have an S curve
 A competitive firm takes P as given, has a supply curve that shows how its
Q depends on P
 A monopoly firm is a price-maker, not a price-taker. Q does not depend on
P, rather Q and P are jointly determined by MC, MR, and the demand