Unit 4: Imperfect CompetitionRegulation & Price
Discrimination
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Memorizing vs. LearningMemorizing vs. Learning12-357111-317192-32931
Try memorizing the above numberHow effective is memorizing it?
The point: If you try to MEMORIZE all the graphs of economics you will
forget them. You must LEARN them!
What do you already know about monopolies?
True or False?1. All monopolies make a profit.2. Monopolies are usually efficient.3. All monopolies are bad for the economy.4. All monopolies are illegal.5. Monopolies charge the highest price
possible6. The government never prevents
monopolies from forming.3
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Review: Origins of MonopoliesReview: Origins of Monopolies1. Geography is the Barrier to EntryEx: Nowhere gas stations, De Beers Diamonds,
Philadelphia Eagles, Cable TV, Stadium Hot Dogs…-Location or control of resources limits competition and leads to one supplier.
2. The Government is the Barrier to EntryEx: Water Company, Firefighters, The Army,
Pharmaceutical drugs, rubix cubes… -Government allows monopoly for public benefits or
to stimulate innovation. -The government issues patents to protect inventors
and forbids others from using their invention. (They last 20 years)
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Review: Origins of MonopoliesReview: Origins of Monopolies3. Technology or Common Use is the Barrier to EntryEx: Microsoft, Intel, Frisbee, Band-Aid…-Patents and widespread availability of certain products
lead to only one major firm controlling a market.
4. Mass Production and Low Costs are Barriers to EntryEx: Advantage of BIG company vs. small company
• If there were three competing electric companies they would have higher costs.
• Having only one electric company keeps prices low-Economies of Scale make it impractical to have
smaller firms. Natural Monopoly- It is NATURAL for only one firm to
produce because fixed costs are often very high.6
D
MR
$10
9
8
7
6
5
MCATC
1016 17 18 19 20 Q
P
How much is the TR, TC and Profit or Loss?
Profit =$20
Conclusion: A monopoly produces where MR=MC, buts charges the set by the demand curve.
Are Monopolies Efficient??
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Monopolies are inefficient because they…1. Charge a higher price2. Don’t produce enough
• Not allocatively efficiency3. Produce at higher costs
• Not productively efficiency4. Have little incentive to innovate• Why? Because there is little external pressure to be efficient
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Where is CS and PS for a monopoly?
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Monopolies vs. Perfect Competition
Q
P
D
S = MC
MR
Pm
Qm
CS
PS
Total surplus falls. Now there is
DEADWEIGHT LOSS
Regulating Monopolies
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How do they regulate?•Use Price controls: Price Ceilings•Why don’t taxes work?
•Taxes limit supply and that’s the problem
Why Regulate?Why would the government regulate a
monopoly? 1. To keep prices lower/fairer 2. To make monopolies efficient
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2. Socially Optimal PriceP = MC (Allocative Efficiency)
Where should the government place the price ceiling?
1. Fair-Return Price (Break–Even)
P = ATC (Normal Profit)
OR
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D
MR
MC
ATC
17Q
P
Regulating MonopoliesWhere does the firm produce if it is
UNREGULATED?
Pm
Qm
D
MR
MC
ATC
18Q
P
Regulating MonopoliesPrice Ceiling at Fair Return
Pm
Qm
Pso
Qso
Fair Return means no economic profit
Pfr
Qfr
D
MR
MC
ATC
19Q
P
Regulating MonopoliesPrice Ceiling at Socially Optimal
Pm
Qm
Pso
Qso
Socially Optimal = Allocative Efficiency
D
MR
MC
ATC
20Q
P
Regulating Monopolies
Pm
Qm
Pso
Qso
Unregulated
Pfr
Qfr
Socially Optimal
Fair Return
QDMR
MC
ATC
P
Regulating a Natural Monopoly
21Qsocially optimal
What happens if the government sets a price ceiling to get the socially optimal quantity?
If this causes firm to take a loss, gov’t must
subsidize the difference.
Pso
Price Discrimination
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Price DiscriminationDefinition:Practice of selling the same products to different buyers at different prices
Brainstorm several examples of this in the real world…
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Price Discrimination
•Airline Tickets (vacation vs. business)•Movie Theaters (child vs. adult) •Member Discounts•Senior Discounts•HS football games or musicals (students vs. parents)•All Coupons (spenders vs. savers)
Examples:
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PRICE DISCRIMINATION•Price discrimination seeks to charge each consumer what they are willing to pay in an effort to increase profits.•Those willing and able to pay more are charged more
Requires the following conditions:1. Must have monopoly power2. Must be able to segregate the market 3. Consumers must NOT be able to resell
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P Qd TR MR
$11 0 0 -
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$10
P Qd TR MR
$11 0 0 -
$10 1 10 10
Results of Price Discrimination
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$10
P Qd TR MR
$11 0 0 -
$10 1 10 10
$9 2 19 9$10 $9
Results of Price Discrimination
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$10
P Qd TR MR
$11 0 0 -
$10 1 10 10
$9 2 19 9
$8 3 27 8$10 $9
$10 $9 $8
Results of Price Discrimination
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$10
P Qd TR MR
$11 0 0 -
$10 1 10 10
$9 2 19 9
$8 3 27 8
$7 4 34 7
$10 $9
$10 $9 $8
$10 $9 $8 $7
Results of Price Discrimination
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$10
P Qd TR MR
$11 0 0 -
$10 1 10 10
$9 2 19 $9
$8 3 27 $8
$7 4 34 $7
$6 5 40 $6
$5 6 45 $5
$4 7 49 $4
Results of Price Discrimination
$10 $9
$10 $9 $8
$10 $9 $8
$10 $9 $8 $7
$7
$6
$5$10 $9 $8 $7 $6
$10 $9 $8 $7 $6 $5 $431
$10
P Qd TR MR
$11 0 0 -
$10 1 10 10
$9 2 19 $9
$8 3 27 $8
$7 4 34 $7
$6 5 40 $6
$5 6 45 $5
$4 7 49 $4
$10 $9
$10 $9 $8
$10 $9 $8
$10 $9 $8 $7
$7
$6
$5$10 $9 $8 $7 $6
$10 $9 $8 $7 $6 $5 $4
WHEN PERFECTLY PRICE DISCIMINATING
MR = D
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Regular Monopoly vs. Price Discriminating Monopoly
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D
MR
MC
ATC
Q
P
Pm
Qm
SINGLE PRICE MONOPOLY
A perfectly discriminating monopoly can charge each person differently so the MR = D
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D
MR
MC
ATC
Q
P
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D=MR
MC
ATC
Q
P
Qnm
Identify the Price, Profit, CS, and DWL
A perfectly discriminating monopoly can charge each person differently so the MR = D
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D=MR
MC
ATC
Q
P
Qnm
Identify the Price, Profit, CS, and DWL
A perfectly discriminating monopoly can charge each person differently so the MR = D
Price Discrimination results in multiple prices, more profit, no CS, and if perfect
price discrimination… allocative efficiency (socially optimal output)
Can You Do The Following?
1. Draw a single-price, unregulated monopoly making a profit and identify price, quantity, and profit.
3. Draw a price discriminating monopoly at equilibrium and label price, quantity, MR, and profit
2. Draw a perfectly competitive industry AND firm at long-run equilibrium
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