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chapter 7 : monopoly (price discrimination
the business practice of…
chapter 7 : monopoly
price discrimination
- the business practice of selling the same good at different prices to different customers, even the costs for producing are the same
- price discrimination, firm must have some market power
- perfect price discrimination refers to situation when monopolist knows exactly the willingness to pay and can change customer at different price
- two important effects of price discrimination
- increase the monopolist;s profits
- reduce deadweight loss
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examples of price discrimination
- movie tickets
- airline tickets
- discount coupons
how prevalent are the problems of monopolies??
- monopolies are common
- most firms have some control over their prices
- frims with substantial monopoly power are rare
- few goods are truly unique
natural monopolies
- natural monopoly = single firm supply a good to entire market at smaller cost than could tow or more firms
- natural monopoly arises when there are economics over the relevant range of output
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how monopolies make production and pricing decisions
- monopoly versus competition
- monopoly
sole producer, faces downward-sloping demand curve, price marker, reduces price to increase sales
- competitive firm
many producers, faces horizontal demand curve, price taker, sells much or little at same price
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monopoly's revenue
- total revenue (P X Q = TR)
- average revenue (TR/Q = AR = P)
- marginal revenue (changes of TR / changes of Q = MR)
- monopolist's marginal revenue is always less than price of its good
- demand curve is downward sloping
- monopoly drops, revenue decreases
- when monopoly increases, output effect of quantity will become higher, price will falls
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profit Maximization
- producing the quantity at marginal revenue equals marginal cost (MR=MC)
- demand curves use to find the price that will induce consumers to buy that quantity
- competitive market (price equal marginal cost)
P = MR = MC
- monopoly firm (price > marginal cost)
P > MR = MC
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monopoly's Profit
profit = TR -TC
profit = (TR/Q -TC/Q) x Q
profit = (P - ATC) x Q
- monopolist will receive economic profit as long as price is greater than average total cost
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-
why monopolies arise
- fundamental cause monopoly is barriers to entry
-competitive firm is price taker, monopoly firm is price maker
- barriers to enrty cz:
- ownership of key resource
- government give single firm the exclusive right to produce some good
- costs of production make single producer more efficient than large number of producers
government-Created monopolies
- government giving single firm the exclusive right to sell particular good in certain markets
- patent and copyright laws are important of government creates a monopoly to serve the public interest
the welfare cost of monopoly
- competitive firm, monopoly changes price above the marginal cost
- at standpoint of consumers, high price makes monopoly undesirable
- at standpoint at owners of firm, high price make monopoly very desirable
public policy toward monopolies
- government responds to problem of monopoly in four ways
- making monopolized industries more competitive
- regulating the behavior of monopolies
- turning some private monopolies into public enterprises
- doing nothing at all