University of Hawai‘i at
Mānoa
Department of Economics
ECON 130 (003): Principles of Economics
(Micro)
http://www2.hawaii.edu/~lindoj
Gerard Russo
Lecture #24
Thursday, April 8, 2004
ANNOUNCEMENTS
LAST LECTURE

Tuesday, May 4, 2004, 12:00-1:15 PM,
152
BIL
Review Session

Thursday, May 6, 4:30-5:30 PM, BIL 152
FINAL EXAMINATION

Thursday, May 13, 2004, 12:00-2:00 PM, BIL
152
Lecture #24
Monopoly (continued)
Regulated Natural Monopoly
Price Discrimination
1st Degree (Perfect)
 2nd Degree
 3rd Degree

Natural Monopoly
Economies of Scale
Declining Average Cost
Efficient Production Implies One Firm
$/Q
Natural Monopoly
D
LATC
LMC
0
MR
Q
$/Q
Monopoly Pricing
P>MR=MC
PM
D
LATC
LMC
0
QM
MR
Q
$/Q
Regulated Natural Monopoly
Socially Optimal Output Level=Q*
P=LMC, “Marginal Cost Pricing”
D
LATC
LMC
P*
0
MR
Q*
Q
$/Q
Regulated Natural Monopoly
P=LMC <LATC
Firm Suffers Economic Loss
Profits<0
D
LATC
LATC*
LMC
P*
0
MR
Q*
Q
$/Q
Regulated Natural Monopoly
P=LATC, “Average Cost Pricing”
Firm Breaks Even, Profits=0
D
PAC
LATC
LMC
0
MR
QAC
Q
$/Q
Monopoly Pricing: P>MR=MC
Average Cost Pricing: P=LATC
PM
D
Marginal Cost Pricing:
P=LMC
PAC
P*
0
LATC
LMC
QM
MR
QAC Q*
Q
Monopoly
Price Discrimination
1st Degree (Perfect)
 2nd Degree
 3rd Degree

Price Discrimination
Charging different prices to different
customers for the same good or service,
where the difference is not justified by cost.
Necessary Conditions



Market (Monopoly) Power
Identify and segment different customers and
markets
Prevent Arbitrage
3rd Degree Price
Discrimination
$/Q
$/Q
Market A
Market B
PB
PA
MC
DB
DA
QA
MRA
Q
QB
MRB
Q
$/Q
Competition
Gross Social Benefits = E+F; Consumers’ Surplus = E
Social Cost = F; Producers’ Surplus = zero.
Net Social Benefits = E
Perfect Price Discriminating Monopoly
E
Gross Social Benefits = E+F
Social Cost = F; Consumers’ Surplus=zero
Net Social Benefits = E;
Producers’ Surplus = E.
LRS:
LMC=LATC
PC
F
0
D: MR
QC QM
Q
2nd Degree Price
Discrimination
$/Q
P1
P2
P3
PC
LRS:
LMC=LATC
D
0
Q1 Q 2
Q3 QC
MR
Q