Monopolistic Competition,
Price Discrimination
Brandon Chang, Thomas Chang
Monopolistic Competition
• Characteristics
• Market structure where there are large
number of sellers.
• Sells slightly differentiated products.
• Has some price setting power
• Very low entry barrier to market
• Allocatively and productively inefficient
Monopolistic Competition in
the Long Run
• Firms in monopolistic competition cannot
make economic profit in the long run.
Short Run
• Short run similar to
monopoly market
• Demand is
downward sloping
• Marginal Revenue is
below demand curve
– Slopes down twice as
steeply
Long Run
• Caused by low entry barrier
to market
• When firms make economic
profit other firms join
– The demand and
marginal revenue
decreases and flattens
out
• No economic profit
• New Demand is tangent to
the ATC curve
Economic Loss
• Once firms start facing economic losses,
they can simply leave the market.
• This increases the demand for other firms
inside the market.
Efficiency
• Productively inefficient
• - Not producing at a quantity where average
total cost is lowest
• Firms are not using their resources in the least
cost manner.
• Allocatively inefficient
• - The demand curve (marginal benefit) is not
equal to marginal cost
• Firms are restricting their output to make profit
• Producing at less than socially optimal quantity
Definition
 Price Discrimination:
 A business sells the same good to
customers at different prices
 The cost to manufacture the
product is the same
Chang Airlines
Chang Airlines
Chang Airlines
Requirements for Price
Discrimination
•
Price discrimination is not possible when a good is
sold in a competitive market since there are many
firms all selling at the market price. In order to price
discriminate, the firm must have some market power.
• For a firm to price discriminate, it must have some
market power
• Monopoly, Oligopoly, Monopolistic Competition (not
Perfect Competition)
• For a firm to price discriminate, it must know the
consumers’ willingness to pay
Effects of Price Discrimination
• Two important effects of price
discrimination:
• It can increase the monopolist’s
profits.
• It can reduce deadweight loss.
Single-Price Monopolist
(a) Monopolist with Single Price
Price
Consumer
surplus
Deadweight
loss
Monopoly
price
Profit
Marginal cost
A monopolist
who charges
everyone the
same price
Marginal
revenue
0
Quantity sold
Demand
Quantity
Deadweight Loss and
Efficiency
Price
Marginal cost
Value
to
buyers
Cost
to
monopolist
Cost
to
monopolist
Value
to
buyers
Demand
(value to buyers)
Quantity
0
Value to buyers
Value to buyers
is greater than
is less than
cost to seller.
cost to seller.
Efficient
quantity
Deadweight Loss
• The Inefficiency of Monopoly
– The monopolist produces less than the socially
efficient quantity of output.
Deadweight Loss and
Efficiency
Price
Deadweight
loss
Marginal cost
Monopoly
price
Marginal
revenue
0
Monopoly Efficient
quantity quantity
Demand
Quantity
Deadweight Loss
• Because a monopoly sets its price above
marginal cost, it places a wedge between
the consumer’s willingness to pay and
the producer’s cost.
• This wedge causes the quantity sold
to fall short of the social optimum.
Examples
Examples of Price Discrimination
• Movie tickets
• Airline prices
• Discount coupons
• Financial aid
• Quantity discounts
Multiple Choice: Q. 1
1. Which of the following is a characteristic
of a monopolistic competition?
a. A standardized product
b. Many sellers
c. Barrier to entry
d. Positive long-run profits
e. A perfectly elastic demand curve
Multiple Choice: Q. 1
B
Multiple Choice: Q. 2
Which of the following results is possible for a monopolistic
competitor in the short run?
I. positive economic profit
II. Normal profit
III. Loss
a. I only
b. II only
c. III only
d. I and II only
e. I, II, III
Multiple Choice: Q. 2
E
Multiple Choice: Q. 3
Which of the following results is possible for a monopolistic
competitor in the short run?
I. positive economic profit
II. Normal profit
III. Loss
a. I only
b. II only
c. III only
d. I and II only
e. I, II, III
Multiple Choice: Q. 3
B
Multiple Choice: Q. 4
The long-run outcome in a monopolistically
competitive industry results in
a. Inefficiency because firms earn positive
economic profits
b. Efficiency due to excess capacity
c. Inefficiency due to product diversity
d. Efficiency because price exceeds marginal cost
e. A trade-off between higher average total cost
and more product diversity
Multiple Choice: Q. 4
E
Multiple Choice: Q. 5
1. Which of the following characteristics is
necessary in order for a firm to price
discriminate?
a. free entry and exit
b. differentiated product
c. many sellers
d. some control over price
e. horizontal demand curve
Multiple Choice: Q. 5
D
Multiple Choice: Q. 6
2. Price discrimination
a. is the opposite of volume discounts.
b. is a practice limited to movie theaters and
the airline industry.
c. can lead to increased efficiency in the
market.
d. rarely occurs in the real world.
e. helps to increase the profits of perfect
competitors.
Multiple Choice: Q. 6
C
Multiple Choice: Q. 7
3. With perfect price discrimination, consumer
surplus
a. is maximized.
b. equals zero.
c. is increased.
d. cannot be determined.
e. is the area below the demand curve above
MC.
Multiple Choice: Q. 7
B
Multiple Choice: Q. 8
4. A price discriminating monopolist will charge
a higher price to consumers with
a. a more inelastic demand.
b. a less inelastic demand.
c. higher income.
d. lower willingness to pay.
e. less experience in the market.
Multiple Choice: Q. 8
A
True or False: Q. 1
• A single-price monopolist sells to
some customers that would not find
the product affordable if purchasing
from a price-discriminating
monopolist.
True or False: Q. 1
FALSE
True or False: Q. 2
• A price-discriminating monopolist
creates more inefficiency than a
single-price monopolist because it
captures more of the consumer
surplus.
True or False: Q. 2
FALSE
True or False: Q. 3
• Under price discrimination, a
customer with highly elastic demand
will pay a lower price than a customer
with inelastic demand.
True or False: Q. 3
TRUE
Skill Testing Question
Which of the following are cases of price discrimination and
which are not? In the cases of price discrimination, identify
the consumers with high price elasticity of demand and
those with low price elasticity of demand.
a. Damaged merchandise is marked down.
b. Restaurants have senior citizen discounts.
c. Food manufacturers place discount coupons for their
merchandise in newspapers.
d. Airline tickets cost more during the summer peak flying
season.