Unit 4:
Imperfect Competition
Regulation & Price
Discrimination
1
Memorizing vs. Learning
12-357111-317192-32931
Try memorizing the above number
How 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.
2.
3.
4.
5.
All monopolies make a profit.
Monopolies are usually efficient.
All monopolies are bad for the economy.
All monopolies are illegal.
Monopolies charge the highest price
possible
6. The government never prevents
monopolies from forming.
3
4
Review: Origins of Monopolies
1. Geography is the Barrier to Entry
Ex: 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 Entry
Ex: 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)
5
Review: Origins of Monopolies
3. Technology or Common Use is the Barrier to Entry
Ex: 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 Entry
Ex: 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
Conclusion: A monopoly produces where MR=MC,
buts charges the set by the demand curve.
How much is the TR, TC and Profit or Loss?
P
MC
ATC
$10
Profit =$20
9
8
7
6
D
5
MR
16 17 18 19 20
Q
10
Are Monopolies
Efficient??
11
Monopolies are inefficient because
they…
1. Charge a higher price
2. Don’t produce enough
• Not allocatively efficiency
3. Produce at higher costs
• Not productively efficiency
4. Have little incentive to innovate
• Why? Because there is little
external pressure to be efficient
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Monopolies vs. Perfect Competition
Where is CS
and PS for a
monopoly?
P
S = MC
CS
Total surplus falls.
Now there is
DEADWEIGHT
LOSS
Pm
PS
D
MR
Qm
Q
13
Regulating
Monopolies
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Why Regulate?
Why would the government regulate a
monopoly?
1. To keep prices lower/fairer
2. To make monopolies efficient
How do they regulate?
•Use Price controls: Price Ceilings
•Why don’t taxes work?
•Taxes limit supply and that’s the problem
15
Where should the government
place the price ceiling?
1. Fair-Return Price (Break–Even)
P = ATC (Normal Profit)
OR
2. Socially Optimal Price
P = MC (Allocative Efficiency)
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Regulating Monopolies
Where does the firm produce if it is
UNREGULATED?
P
MC
Pm
ATC
D
MR
Qm
Q
17
Regulating Monopolies
Price Ceiling
Returnprofit
Fair Return
meansat
noFair
economic
P
MC
Pm
Pso
Pfr
ATC
D
MR
Qm
Qso Qfr
Q
18
Regulating Monopolies
PriceOptimal
Ceiling at
Socially Optimal
Socially
= Allocative
Efficiency
P
MC
Pm
Pso
ATC
D
MR
Qm
Qso
Q
19
Regulating Monopolies
Unregulated
P
Socially
Optimal MC
Fair
Return
Pm
Pso
Pfr
ATC
D
MR
Qm
Qso Qfr
Q
20
Regulating a Natural Monopoly
What happens if the government sets a price ceiling
to get the socially optimal quantity?
P
If this causes firm to
take a loss, gov’t must
subsidize the difference.
MC
ATC
Pso
MR
D
Qsocially optimal Q
21
Price
Discrimination
22
Price Discrimination
Definition:
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
Examples:
•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)
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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 power
2. Must be able to segregate the market
3. Consumers must NOT be able to resell
product
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P
Qd
$11
0
TR MR
0
-
26
Results of Price
Discrimination
$10
P
Qd
$11
$10
0
1
TR MR
0
10
10
27
Results of Price
Discrimination
$10
P
Qd
$11
$10
$9
0
1
2
TR MR
0
10
19
10
9
$10 $9
28
Results of Price
Discrimination
$10
$10 $9
$10 $9
P
Qd
$11
$10
$9
$8
0
1
2
3
TR MR
0
10
19
27
10
9
8
$8
29
Results of Price
Discrimination
$10
$10 $9
$10 $9
$8
$10 $9
$8
P
Qd
$11
$10
$9
$8
$7
0
1
2
3
4
TR MR
0
10
19
27
34
10
9
8
7
$7
30
Results of Price
Discrimination
$10
$10 $9
$10 $9
$8
$10 $9
$8
$7
$10 $9
$8
$7
$6
$10 $9
$8
$7
$6
$5
$10 $9
$8
$7
$6
$5
P
Qd
$11
$10
$9
$8
$7
$6
$5
$4
0
1
2
3
4
5
6
7
TR MR
0
10
19
27
34
40
45
49
10
$9
$8
$7
$6
$5
$4
$4
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P
$10
$10 $9
$10 $9
$10 $9
$10 $9
Qd
TR MR
$11 0
0
$10 1
10
$9
2
19
$8
3
27
WHEN PERFECTLY
$7
4
34
$8
PRICE DISCIMINATING
$6
5
40
$8 $7 MR = D$5 6 45
$4
7
49
$8 $7 $6
$10 $9
$8
$7
$6
$5
$10 $9
$8
$7
$6
$5
10
$9
$8
$7
$6
$5
$4
$4
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Regular Monopoly vs.
Price Discriminating Monopoly
P
SINGLE PRICE MONOPOLY
MC
Pm
ATC
D
MR
Qm
Q
33
A perfectly discriminating monopoly can charge
each person differently so the MR = D
P
MC
ATC
D
MR
Q
34
A perfectly discriminating monopoly can charge
each person differently so the MR = D
Identify the Price, Profit, CS, and DWL
P
MC
ATC
D =MR
Qnm
Q
35
A perfectly discriminating monopoly can charge
each person differently so the MR = D
Identify the Price, Profit, CS, and DWL
P
MC
ATC
D =MR
Price Discrimination results in multiple
prices, more profit, no CS, and if perfect
price discrimination… allocative
efficiency
Q
Q
nm
36
Can You Do The Following?
1. Draw a single-price, unregulated
monopoly making a profit and identify
price, quantity, and profit.
2. Draw a perfectly competitive
industry AND firm at long-run
equilibrium
3. Draw a price discriminating
monopoly at equilibrium and label
price, quantity, MR, and profit
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