unit 4: imperfect competition regulation & price discrimination 1

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

product25

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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