10_ilt_be session 09 (market structure analysis-ii 5[1].3.11)

8/6/2019 10_ILT_BE Session 09 (Market Structure Analysis-II 5[1].3.11)

1/19

Business Economics

Faculty:Prof. Sunitha Raju

Session 10 : Market Structure Analysis-II

Session Date: 5.3. 2011


2/19

EPGDIB(VSAT) 2010-11

Business Economics/ Session: 10

Pricing Behaviour : Monopoly

(i) Market Price

Downward sloping demand curve

can fix either Price or Quantity

under produces

(ii) Economic profits continue

High entry barriers no threat of competition

Should a Monopolist spend on Advertisement?


3/19



Monopoly Profits : Implications of

a Shift in Demand Curve

Changes in demand conditions induce a shift in demand curve and MR

curve.

Rightward shift in demand curve results in

higher prices higher quantity sold

..

MC

AC

AR2MR2

AR1

MR1

P2

P1

Q2Q1


4/19



Monopoly Profits : Implications of

Rising Costs

1. Effect of a Lumpsum Tax

Leads to an increase in Fixed costs

No shift in MC / Supply curve

Short run and long run equilibrium unchanged

Increase in fixed costs results in upward shift inSRAC. Hence, excess profits reduce.

If this results in substantial shift in SRAC (i.e.above demand curve), losses are incurred.

Contd


5/19


Business Economics/ Session: 10.

.

P1

Q1

AR

AC1

AC2

MR

MC

AC

Monopoly Profits

Similar effect for R & D expenditure

Contd


6/19



2. Effect of Specific Sales Tax

Leads to an increase in Variable Costs.

Upward shift in the MC curve

change in equilibrium Price & Quantity

Can a Monopolist shift the tax burden to the Consumer?


7/19



Monopoly Profits : Implications of a

Shift in Supply Curve

Changes in Supply conditions leads to shifts in MCcurve

Upward shifts in MC curve results in

higher prices

higher quantity

..

MC2MC1

AR

MR

AC1P2

P1

Q2 Q1

Contd


8/19


9/19



Who Bears the Cost/Tax Burden

A positive sloped supply curve implies incremental

costs shared between buyer and seller

Supply elasticity < Demand elasticity

burden of incremental cost higher on firms

Supply elasticity > Demand elasticity

burden of incremental cost higher on buyers


10/19



Monopoly : Effect of Specific

Sales Tax

Monopolist is not able to pass the total burden of

Tax on to the consumer in (A)

. .MC/ Tax

AR

MR

Q

P

P

MC2

MC1

P < Tax

.

.MC/ Tax

AR

MR

MC2

MC1

P

P

Q

P ~ Tax

(A) (B)


11/19



Monopoly : Price Discrimination

Same product is sold at different prices in different

prices

Cost of production is same or differs but not as much

as difference in prices charged


12/19



Deriving the Combined Demandand MR Curves

(a) International Market (b) Domestic Market

P=AR=MR

P

Q

P

Q

P=AR

MR

Contd


13/19


Business Economics/ Session: 10(c) Combined MR Curve / How much to Supply?

P M1 M2 M1+M2

10 0 5 5

8 0 4 4

6 0 3 3

1 2

4 0 0

MR

P

Q

CMR


14/19



How much to Supply in each

Market?

Equilibrium QuantityCMR = MC

Price Quantity in each market based on MR = MChigher price where price elasticity low

lower price where price elasticity high

P=AR=MR

.

.

MC

CMRP=AR

MR

Q1D

Q*

P1D

PD

PI

Q1

.


15/19



Pre-requisites for Price

Discrimination

Segmented Markets

P different between markets

No resale between markets


16/19



Price Discrimination vs Single

Market Pricing

Assume the following Demand & Cost curves

P = 100 2Q

C = 50 + 40Q

Determining Profit maximising P & Q

max where MR = MC

(i) We find MR

TR = PQ = Q (100 2Q)

Q

Q

TRMR 4100

)(!

x

x!

Contd


17/19


Business Economics/ Session: 10(ii) We find MC

TC = 50 + 40 Q

(iii) Equilibrium Price & Quantity

MR = MC

100 4Q = 40

Q = 15 P = 70 = 400

40)( !x

x!QTCMC

Contd


18/19



Assume that the market is segmented with the following

demand curves

P1 = 80 2.5Q1P2 = 180 10Q2

(Q1 + Q2 = Q)

C = 50 + 40Q = 50 + 40 (Q1 + Q2)

Contd


19/19


Business Economics/ Session: 10Profit Maximization Implies

= R1 + R2 - C

P1 = (80 2.5Q1) R1 = 80Q

P2 = (180 10Q) R2 = 180Q

MR 1 = 80 5Q

MR2 = 180 20Q

MC = 40

MR1 = MC 80 5Q = 40

Q1 = 8, P1 = 60, = 110

MR2 = MC 180 20Q = 40

Q2 = 7, P2 = 110, = 440

Total Profits (M1 + M2) = 110 + 440 =

2

15.2 Q

2

210Q

550

10_ilt_be session 09 (market structure analysis-ii 5[1].3.11)

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