ECON1 Spring 2011 Week 08 March 29, 2011 Classnotes : Monopoly = Price Searcher
(Chapter 15)
1. All firms that are not in perfectly competitive markets face a downward sloping demand curve.
We can then use the (monopoly model = Price Searcher) to represent the pricing behavior and
production decision of all other firms.
2. If demand is downward sloping, marginal revenue is less then Price.
Demand
Price Qty
$10
1
$9
2
$8
3
$7
4
$6
5
Total Revenue Marginal Revenue
$ 10
$ 18
$ 24
$ 28
$ 30
$10
$8
$6
$4
$2
The marginal revenue (addition to revenue from selling one more unit) is less than price, because
to sell more, you must lower the price to all buyers.
3. The degree of competition facing the firm is reflected by the elasticity of demand. With fewer
competitors the demand is more inelastic (steeper), with more competitors it is more elastic
(flatter)
4. The monopoly model: downward sloping demand curve
$Price
Marginal
Cost
Demand
Pm
MC
Marginal
Revenue
Qm
Qty / Time
5. The profit maximizing output is where MR = MC, just like for the price taker firm.
6. The Price is above MR, and therefore, the price is above marginal cost (MC).
7. The ratio of price to marginal cost is a measure of the market power of the firm. (i.e. the fewer
the competitors, the greater the ratio)
8. Monopoly Profits ?
MC
$ Price
Demand
ATC
Pm
$ Profit
AC
Marginal
Revenue
Qty / Time
Qm
9. Monopoly profits only occur if TR( Pm x Qm) is greater than TC (AC x Qm) There is nothing in
being a monopoly that guarantees profits.
A. The existence of profits will stimulate resource owners to produce similar products.
B. As more close substitutes enter the market, the demand facing the monopoly will decline
and become more elastic. This means competition will bring lower prices and lower profits. There
are no profits in the long run, UNLESS the firm can limit competition.
C. Monopoly after competition from similar products.
MC
$ Price
ATC
Pm
Demand
MR
Qm
Qty / Time
10. Efficiency ( Dead-Weight) Loss from reduced output ?
Marginal
Cost
$Price
Pm
D
MC
MR
Qm
Qc
Qty / Time
The monopolist produces at Qm so the units from Qm to Qc are not produced. Since these
units have a marginal cost of production that is less than the marginal value to buyers, there is a
potential efficiency loss of the shaded area. (MV – MC)
11.Solutions:
A. Government Price regulation (set price equal to average cost.)
B. Enforcement of Anti-Trust Laws: Prohibits the most egregious anti-competitive acts
C. Price Discrimination (Multiple Price Policies)
Since many firms use multi-part pricing the efficiency loss is most often overstated. If
firms can charge different prices for different units sold, they may be able to increase output to
the social optimum of Qc.
1. First Degree: Charging different customers different prices. (i.e. moving down
the demand curve)
a. Auction
b. College scholarships
2. Second Degree: (Quantity Forcing) Offering a schedule of prices to all buyers,
which successively lowers the price for additional units, purchased (Moving down each buyers
individual demand)
a. Buy 3, get 4th free.
b. Product prices,
medium16 oz. $ 1.09, .068125/oz.
large: 22 oz. $ 1.19, 6 oz. @ .0167/oz.
extra large:32 oz. $1.29, 10 oz. @ .01/ oz.
gulp: 44 oz. $ 1.49, 12 oz. @ .0167/ oz.
3. Third Degree: Charging different prices to different groups according to
different elasticity of Demand.
a. Grocery coupons
b. Prescription drugs in different countries.
c. Doctors medical Services
d. Newly Released unique products
4. Requires certain necessary conditions.
a. Ability to identify and separate buyers by elasticity of demand.
b. Collect different prices from the different buyers
c. Prevent Resale