Economics 111.3 Winter 14
April 4th, 2014
Lecture 32
Ch. 13: Pure monopoly
Final Exam:
FINAL EXAM is based on chapters 3, 4, 5 (up
to p. 116), 6 (up to p. 138), 8, 9, 10 (up to p.
230, 11, 12, 13, and 14
Its format: 100 Multiple-Choice Questions
When and Where: April 21,
from 7:00 p.m. to 10:00 p.m; STM 140
Extra Office Hours: April 19, from
1:00 p.m. to 3:00 p.m.
A recap:
The Price-Discriminating
Monopolist
• A price-discriminating monopolist can charge
customers with more inelastic demands a higher
price.
• It can charge customers with more elastic
demands a lower price
• As a result, a price discriminating monopolist
earns more profit than a normal monopolist
• Example: Aspirin sold in airports is much more
expensive than the Aspirin sold in grocery stores
Examples of price discrimination:
• Airlines charge high fares to executive travelers (inelastic demand)
than vacation travelers (elastic demand).
• Electric utilities frequently segment their markets by end uses, such
as lighting and heating. (Lack of substitutes for lighting makes this
demand inelastic).
• Long-distance phone service has higher rates during the day, when
businesses must make their calls (inelastic demand), and lower rates
at night and on week-ends, when less important calls are made.
• Movie theatres and golf courses vary their charges on the basis of
time and age.
• Discount coupons are a form of price discrimination, allowing firms
to offer a discount to price-sensitive customers.
• International trade has examples of firms selling at different prices to
customers in different countries.
Suppose Global Air has identifiable
customer groups:
– last-minute business travelers,
willing to pay up to $1800 per
trip
– scheduled business travelers,
willing to pay up to $1600 per
trip, no weekend layovers
– other travelers, willing to pay
up to $1400, no weekend
layovers
– vacationers, willing to pay up
to $1200, and to stay over
Saturday night
Perfect Price Discrimination
Perfect price discrimination
refers to the situation when
the monopolist knows exactly
the willingness to pay of each
customer and can charge each
customer a different price.
Perfect Price Discrimination
With perfect price
discrimination, output
increases to the point at
which price equals
marginal cost — where
the marginal cost
intersects the demand
curve.
Output is identical to that
of perfect competition.
Perfect Price Discrimination and
Efficiency
• Perfect price discrimination
pushes consumer surplus to
zero but increases producer
surplus to equal the sum of
consumer surplus and
producer surplus in perfect
competition.
• Deadweight loss is zero:
perfect price discrimination
achieves efficiency.
True-False Questions
1. In the long run the pure monopolist must
produce at that output where average
total cost is at a minimum.
2. The supply curve for a monopolist is the
upsloping portion of the marginal cost
curve that lies above the average
variable cost curve.
3. Monopolistic producers always earn
economic profits.
4. A monopolist practicing perfect price
discrimination will produce at a
socially optimal level of output
5. A monopolist practicing price
discrimination will charge a higher
price in the market with the higher
elasticity of demand
Ch. 14: Monopolistic
Competition
Four Market Structures
Market structure involves the number of firms in the
market and the barriers to entry
Monopolistic competition is a market structure in which
there are many firms selling differentiated products but
competing with other firms selling similar products
Oligopoly is a market structure in which there are a few
interdependent firms
Pure
Competition
Monopolistic
Competition
Oligopoly
Market Structure Continuum
Pure
Monopoly
A concentration
ratio is the
percentage of
industry sales by
the top few firms
of the industry
Competitive and Monopolistic aspects
• The “many sellers” characteristic gives monopolistic competition
its competitive aspect. As a result:
• firms do not take into account their rivals’ responses to their
decisions.
• collusion (price fixing) is difficult (due to a large number of firms)
• there is easy entry of new firms in the long run
• Its monopolistic aspect comes from product differentiation
based upon:
• product attributes, service, location, brand names, packaging
• perceived quality
• competitive advertising.
Easy Entry of New Firms in
the Long Run
• There are no significant barriers to
entry in monopolistic competition.
• The existence of economic profits
induces other firms to enter, bringing
long-run profit down to zero.
expect new
competitors
Price and Costs
P
p
MC
ATC
economic
profit
D
MR
Q
Q
demand
curve shifts
left
Price and Costs
P
MC
ATC
p
Economic
profits
decrease
D
MR
Q
Q
in theMC
long
run, profits
ATC
are zero
Price and Costs
P
p
D
Q
MR
Q
ATC
expectMCfewer
competitors
Price and Costs
P
p
loss
D
MR
Q
Q
some firms exit
MC
ATC
D shifts right
losses get
smaller
Price and Costs
P
p
D
MR
Q
Q
MC run,
ATC
in the long
profits are zero
Price and Costs
P
p
D
MR
Q
Q
Easy Entry of New Firms in
the Long Run
Complications:
• persistent positive profits may persist if:
– there is continuing & significant product
differentiation
– entry is somewhat limited by the
financial investment required to
establish product differentiation
• overall, we still expect the general results