This document provides an overview and agenda for a presentation on monopoly markets. It discusses key concepts like market power, characteristics of monopoly, pricing and output decisions. Specifically, it covers how a monopoly determines its optimal output by setting marginal revenue equal to marginal cost (MR=MC). It also discusses implications for managerial decisions like pricing using a markup over marginal cost based on the elasticity of demand. Price discrimination is another strategy discussed for monopoly markets.
An Engineering & Managerial Economics presentation on Price Determination, topics covered were price determination under Perfect Competition, Monopoly, Duopoly and Oligopoly.
This document discusses market structures and price determination. It defines a market as a place where buyers and sellers meet to exchange goods and services. Key components of a market include goods/services, buyers, sellers, and interactions between them. Markets can be classified based on factors like competition, time period, location, and degree of government intervention. Perfect competition and monopolistic competition are examples of different market structures. Price determination results from the interaction of supply and demand in a market. The equilibrium price is where quantity supplied equals quantity demanded. Changes in supply and demand can shift the equilibrium price.
This document discusses oligopolies, which are markets dominated by a few large firms. It covers key concepts like collusion, price leadership, and the prisoners' dilemma. It explains how oligopolistic firms are interdependent and face a kinked demand curve. This leads to price rigidity even when costs change. As price competition is limited, firms compete through non-price factors like innovation, branding, and promotions. Examples show concentration in industries like petrol, cinema, and mobile phones. Price wars can boost sales but hurt profits. Overall, economies of scale, mergers, and barriers to entry tend to increase market concentration over the long-run.
This document appears to be a chapter from a student's paper on microeconomics. It includes:
1) An introduction to monopoly markets and their characteristics.
2) Explanations of monopoly price determination in the short and long-run.
3) Definitions and assumptions related to monopoly, oligopoly, and price determination under different market structures.
4) Discussions of concepts like marginal revenue, marginal cost, equilibrium, and the Sweezy model of the kinked demand curve for explaining price rigidity in oligopolies.
6 price and output determination- monopolydannygriff1
This document discusses monopoly markets, including conditions that lead to monopoly, how monopolies differ from perfect competition in terms of price and output, the relationship between elasticity and monopoly pricing. It also covers the three degrees of price discrimination and how monopolies can calculate profit maximizing price and output levels.
This document discusses economic efficiency and different market structures. It begins by defining economic efficiency and its various forms, including allocative efficiency, productive efficiency, and dynamic efficiency. It then examines different market structures - perfect competition, monopoly, monopolistic competition, and oligopoly - and evaluates how efficiently each allocates resources. Perfect competition achieves full efficiency while monopoly and imperfect competition can be inefficient. Contestable markets use the threat of entry and exit to make monopolies behave more competitively.
An Engineering & Managerial Economics presentation on Price Determination, topics covered were price determination under Perfect Competition, Monopoly, Duopoly and Oligopoly.
This document discusses market structures and price determination. It defines a market as a place where buyers and sellers meet to exchange goods and services. Key components of a market include goods/services, buyers, sellers, and interactions between them. Markets can be classified based on factors like competition, time period, location, and degree of government intervention. Perfect competition and monopolistic competition are examples of different market structures. Price determination results from the interaction of supply and demand in a market. The equilibrium price is where quantity supplied equals quantity demanded. Changes in supply and demand can shift the equilibrium price.
This document discusses oligopolies, which are markets dominated by a few large firms. It covers key concepts like collusion, price leadership, and the prisoners' dilemma. It explains how oligopolistic firms are interdependent and face a kinked demand curve. This leads to price rigidity even when costs change. As price competition is limited, firms compete through non-price factors like innovation, branding, and promotions. Examples show concentration in industries like petrol, cinema, and mobile phones. Price wars can boost sales but hurt profits. Overall, economies of scale, mergers, and barriers to entry tend to increase market concentration over the long-run.
This document appears to be a chapter from a student's paper on microeconomics. It includes:
1) An introduction to monopoly markets and their characteristics.
2) Explanations of monopoly price determination in the short and long-run.
3) Definitions and assumptions related to monopoly, oligopoly, and price determination under different market structures.
4) Discussions of concepts like marginal revenue, marginal cost, equilibrium, and the Sweezy model of the kinked demand curve for explaining price rigidity in oligopolies.
6 price and output determination- monopolydannygriff1
This document discusses monopoly markets, including conditions that lead to monopoly, how monopolies differ from perfect competition in terms of price and output, the relationship between elasticity and monopoly pricing. It also covers the three degrees of price discrimination and how monopolies can calculate profit maximizing price and output levels.
This document discusses economic efficiency and different market structures. It begins by defining economic efficiency and its various forms, including allocative efficiency, productive efficiency, and dynamic efficiency. It then examines different market structures - perfect competition, monopoly, monopolistic competition, and oligopoly - and evaluates how efficiently each allocates resources. Perfect competition achieves full efficiency while monopoly and imperfect competition can be inefficient. Contestable markets use the threat of entry and exit to make monopolies behave more competitively.
Monopoly is a market situation where there is only one seller of a product or service with no close substitutes. A monopoly firm is a price maker that can determine prices to maximize profits. Under monopoly, the demand curve is the average revenue curve, which slopes downward. Marginal revenue is also downward sloping. In the short run, a monopoly can earn super-normal profits, normal profits, or minimize losses. In the long run, monopoly equilibrium occurs where marginal revenue equals marginal cost. A monopoly may also engage in price discrimination, charging different prices to different customers to increase total revenue and profits.
This document contains diagrams and explanations of several key economic concepts related to production possibility frontiers, market supply and demand, price determination, market failure, and government interventions. Some of the key points covered include:
- The production possibility frontier shows the maximum attainable combinations of two goods, with points on or inside the curve representing efficient allocations and points outside being unattainable.
- A shift in market supply or demand leads to changes in the equilibrium price and quantity as the market seeks a new balance.
- Market failures can occur due to externalities, asymmetric information, and public goods problems, resulting in an inefficient allocation of resources.
- Government interventions like taxes, subsidies, and regulations aim to
The document discusses different market structures including perfect competition, monopoly, monopolistic competition, and oligopoly. It provides details on key features, pricing behaviors, and profit determination for each market structure. Perfect competition is characterized by many small firms, homogeneous products, and price taking behavior. A monopoly is dominated by a single seller who is a price maker. Monopolistic competition involves differentiated products and monopolistic behaviors in the short run. Oligopoly involves strategic interactions among a small number of large firms through behaviors like price leadership, kinked demand curves, and cartel agreements.
Here are the key points about costly price discrimination:
- If price discrimination involves costs, it may no longer be profitable for the firm to engage in it. The costs of discrimination must be less than the additional profits it generates.
- As discrimination costs rise, the firm will find it optimal to discriminate less, charging a smaller number of different prices or targeting fewer customer groups. In the limit of very high costs, it may charge a single undifferentiated price.
- This means the firm's output and total welfare may be lower when price discrimination is costly compared to if it could costlessly perfectly price discriminate. Output could fall short of the efficient competitive level.
- Consumers who are charged higher prices as
Detailed presentation on how price is determined, factors effecting price.
The price determination under following markets,
1). Perfect Competition
2). Monopoly
3). Duopoly
4). Oligopoly
have been described in detail.
Price Determination Under Short & Long Period, Cournot Model & Stackelberg Model are also discussed.
The document discusses market structures and perfect competition. It defines perfect competition as a market with many small firms, homogeneous products, firms that are price takers, and easy entry and exit. Under perfect competition, firms are price takers and produce where marginal revenue equals marginal cost to maximize profits. In the long run, perfect competition leads to normal profits as firms enter and exit the market.
This document discusses bilateral monopoly, which refers to a market situation with a single seller (monopolist) and single buyer (monopsonist) of a product. It outlines the assumptions of bilateral monopoly and describes how price and output are determined. Specifically, it notes that the monopolist will seek to sell at a higher price where marginal cost equals marginal revenue, while the monopsonist will seek to buy at a lower price where marginal expenditure equals marginal utility. The actual price and quantity transacted will depend on the relative bargaining strengths of the monopolist and monopsonist, settling somewhere between the two preferred prices.
The document provides an overview of market structures including perfect competition, monopoly, monopolistic competition, and oligopoly. It defines key concepts such as market equilibrium, revenue curves, and profit maximization conditions. For each market structure, it discusses features, pricing determination, and equilibrium in both the short-run and long-run. It also provides examples of Cournot and Bertrand models of oligopoly to illustrate how firms may consider competitors' actions when setting prices and output.
Pricing decisions under different market structuresdvy92010
This document summarizes pricing strategies under different market structures:
- Perfect competition firms are price takers and price is determined by market supply and demand.
- Perishable goods must be sold at the market price on the day, while non-perishable goods can be stored and sold when prices are higher.
- Monopolies are price makers that charge high prices to earn monopoly profits through trial and error or by setting price where marginal revenue equals marginal cost.
- Under monopolistic competition, firms set differentiated prices and the demand curve is elastic. In long run, entry of new firms eliminates economic profits.
- Oligopolies may engage in price rigidity, non-price
Key Diagrams for A2 Business Microeconomicstutor2u
1. The document provides advice on drawing effective diagrams for exam questions, including making diagrams at least half an A4 page, labeling axes clearly, and drawing diagrams at the appropriate technical level required.
2. It then lists 20 common diagrams that may be included in revision materials or exams, covering topics like diminishing returns, costs curves, revenue curves, perfect competition, monopoly, and oligopoly models.
3. The key messages are to practice common exam diagrams to improve accuracy, and to draw diagrams that match the technical specification required rather than oversimplifying the analysis.
This document provides an overview of duopoly, which is a market structure with two sellers. It discusses the two types of duopoly - collusive duopoly where firms coordinate their decisions, and non-collusive duopoly where they do not. Game theory models like the prisoner's dilemma and Cournot competition are explained. The kinked demand curve model is also summarized, which suggests duopoly prices will be rigid as firms will not trigger a price war by undercutting each other. Real-world examples and criticisms of the kinked demand curve are briefly mentioned.
Monopolistic competition is an imperfect market structure between perfect competition and pure monopoly. It is characterized by many small sellers offering differentiated products, free entry and exit into the market, and firms facing downward-sloping demand curves. In the short run, firms can make profits or losses, but in the long run free entry and exit will cause the number of firms to adjust until all firms earn zero economic profits and price equals average total cost.
The document discusses monopoly market structures. It defines a monopoly as a market with a single seller of a product without close substitutes. It notes that monopolies can arise through government protections, control of critical resources, or large capital requirements. The document then examines the characteristics of monopolies, including price setting behavior to maximize profits where marginal revenue equals marginal cost. It also explores various types of price discrimination strategies monopolies may use.
- Monopolistic competition refers to a market with many firms selling differentiated but similar products. Each firm faces a downward sloping demand curve and can influence prices. There is free entry and exit into the market.
- Oligopoly is characterized by a market with only a few firms selling either homogeneous or differentiated products. The firms are interdependent and can influence prices through their decisions. There is restricted entry into the market.
- Consumer surplus measures the difference between what consumers are willing to pay for a good and the actual price paid, representing the extra satisfaction consumers receive. Producer surplus is the difference between the price producers receive and the lowest price they are willing to supply at.
Pricing and Output Decisions in Monopolynazirali423
1. The document discusses monopoly market structure and pricing decisions. A monopoly is characterized by a single firm that produces an entire market's supply of a good or service with no close substitutes.
2. As the sole provider, a monopoly firm has market power and faces a downward-sloping demand curve. It can influence prices and maximizes profits by reducing output and increasing price compared to competitive firms.
3. There are high barriers to entry for other firms, such as patents, licenses, and economies of scale. These barriers allow the monopoly to maintain economic profits in the long run.
This document summarizes key characteristics of monopolistic competition. In 3 sentences: Firms in monopolistic competition have differentiated but substitutable products, they set price between the monopoly and competitive levels where marginal revenue equals marginal cost to earn normal profits in the long run, and while this leads to higher prices than perfect competition it provides benefits to consumers like variety and innovation.
A document outlines key concepts regarding monopoly, including:
1) A monopoly is characterized by a single seller in the market with no close substitutes who acts as a price maker and can block entry of new competitors.
2) A monopoly faces a downward sloping demand curve and can only increase sales by lowering price across all units sold. As a result, marginal revenue is always below price.
3) A profit-maximizing monopoly will produce at the quantity where marginal revenue equals marginal cost and charge the price dictated by the demand curve at that quantity of output.
Macro Economics
For downloading this contact- bikashkumar.bk100@gmail.com
Prepared by Students of University of Rajshahi
Tanvir Ahmed
Md Mamun Islam
Md Shahidul Islam
Anjon Mojumder
Sadia Afrin
This document discusses monopolistic competition, which assumes many producers and consumers, slight product differentiation, producers that have some control over price as "price makers," and low barriers to entry and exit. Examples of industries with monopolistic competition include shoe repairs, taxis, coffee shops, hair salons, dry cleaners, and bars. Under monopolistic competition in the short run, firms have downward sloping demand curves and will produce at the quantity where marginal revenue equals marginal cost to maximize profits, earning supernormal profits when price is above average cost.
This document discusses monopoly power in markets. It defines a pure monopolist as a single supplier that dominates an entire market with 100% concentration. In reality, a working monopoly is deemed to be any firm with over 25% market share, while a dominant firm has at least 40% share. Monopolies can lead to higher prices and lower output compared to competitive markets. However, monopoly power also allows firms to invest profits into research and development. There are economic arguments both for and against monopolies, and intervention may or may not be effective depending on the specific market.
The document discusses production functions and their importance in managerial decision making. It covers topics such as the relationship between inputs and outputs, total product, average product, marginal product, short-run and long-run production functions, returns to scale, and examples of how production functions are used for capacity planning and in various industries. Estimating production functions using statistical methods and examples of common production function forms are also summarized.
Mba1014 consumers markets elasticity 040513Stephen Ong
This document provides an overview of consumer behavior and elasticity concepts for managerial economics. It discusses factors that influence consumer behavior like tastes, preferences and budget constraints. It explains consumer decision making using indifference curves and how preferences can be represented by utility functions. It also covers elasticity concepts like price elasticity, cross elasticity and income elasticity. The document is intended to help understand how consumer choices are made and how elasticity impacts business revenues.
Monopoly is a market situation where there is only one seller of a product or service with no close substitutes. A monopoly firm is a price maker that can determine prices to maximize profits. Under monopoly, the demand curve is the average revenue curve, which slopes downward. Marginal revenue is also downward sloping. In the short run, a monopoly can earn super-normal profits, normal profits, or minimize losses. In the long run, monopoly equilibrium occurs where marginal revenue equals marginal cost. A monopoly may also engage in price discrimination, charging different prices to different customers to increase total revenue and profits.
This document contains diagrams and explanations of several key economic concepts related to production possibility frontiers, market supply and demand, price determination, market failure, and government interventions. Some of the key points covered include:
- The production possibility frontier shows the maximum attainable combinations of two goods, with points on or inside the curve representing efficient allocations and points outside being unattainable.
- A shift in market supply or demand leads to changes in the equilibrium price and quantity as the market seeks a new balance.
- Market failures can occur due to externalities, asymmetric information, and public goods problems, resulting in an inefficient allocation of resources.
- Government interventions like taxes, subsidies, and regulations aim to
The document discusses different market structures including perfect competition, monopoly, monopolistic competition, and oligopoly. It provides details on key features, pricing behaviors, and profit determination for each market structure. Perfect competition is characterized by many small firms, homogeneous products, and price taking behavior. A monopoly is dominated by a single seller who is a price maker. Monopolistic competition involves differentiated products and monopolistic behaviors in the short run. Oligopoly involves strategic interactions among a small number of large firms through behaviors like price leadership, kinked demand curves, and cartel agreements.
Here are the key points about costly price discrimination:
- If price discrimination involves costs, it may no longer be profitable for the firm to engage in it. The costs of discrimination must be less than the additional profits it generates.
- As discrimination costs rise, the firm will find it optimal to discriminate less, charging a smaller number of different prices or targeting fewer customer groups. In the limit of very high costs, it may charge a single undifferentiated price.
- This means the firm's output and total welfare may be lower when price discrimination is costly compared to if it could costlessly perfectly price discriminate. Output could fall short of the efficient competitive level.
- Consumers who are charged higher prices as
Detailed presentation on how price is determined, factors effecting price.
The price determination under following markets,
1). Perfect Competition
2). Monopoly
3). Duopoly
4). Oligopoly
have been described in detail.
Price Determination Under Short & Long Period, Cournot Model & Stackelberg Model are also discussed.
The document discusses market structures and perfect competition. It defines perfect competition as a market with many small firms, homogeneous products, firms that are price takers, and easy entry and exit. Under perfect competition, firms are price takers and produce where marginal revenue equals marginal cost to maximize profits. In the long run, perfect competition leads to normal profits as firms enter and exit the market.
This document discusses bilateral monopoly, which refers to a market situation with a single seller (monopolist) and single buyer (monopsonist) of a product. It outlines the assumptions of bilateral monopoly and describes how price and output are determined. Specifically, it notes that the monopolist will seek to sell at a higher price where marginal cost equals marginal revenue, while the monopsonist will seek to buy at a lower price where marginal expenditure equals marginal utility. The actual price and quantity transacted will depend on the relative bargaining strengths of the monopolist and monopsonist, settling somewhere between the two preferred prices.
The document provides an overview of market structures including perfect competition, monopoly, monopolistic competition, and oligopoly. It defines key concepts such as market equilibrium, revenue curves, and profit maximization conditions. For each market structure, it discusses features, pricing determination, and equilibrium in both the short-run and long-run. It also provides examples of Cournot and Bertrand models of oligopoly to illustrate how firms may consider competitors' actions when setting prices and output.
Pricing decisions under different market structuresdvy92010
This document summarizes pricing strategies under different market structures:
- Perfect competition firms are price takers and price is determined by market supply and demand.
- Perishable goods must be sold at the market price on the day, while non-perishable goods can be stored and sold when prices are higher.
- Monopolies are price makers that charge high prices to earn monopoly profits through trial and error or by setting price where marginal revenue equals marginal cost.
- Under monopolistic competition, firms set differentiated prices and the demand curve is elastic. In long run, entry of new firms eliminates economic profits.
- Oligopolies may engage in price rigidity, non-price
Key Diagrams for A2 Business Microeconomicstutor2u
1. The document provides advice on drawing effective diagrams for exam questions, including making diagrams at least half an A4 page, labeling axes clearly, and drawing diagrams at the appropriate technical level required.
2. It then lists 20 common diagrams that may be included in revision materials or exams, covering topics like diminishing returns, costs curves, revenue curves, perfect competition, monopoly, and oligopoly models.
3. The key messages are to practice common exam diagrams to improve accuracy, and to draw diagrams that match the technical specification required rather than oversimplifying the analysis.
This document provides an overview of duopoly, which is a market structure with two sellers. It discusses the two types of duopoly - collusive duopoly where firms coordinate their decisions, and non-collusive duopoly where they do not. Game theory models like the prisoner's dilemma and Cournot competition are explained. The kinked demand curve model is also summarized, which suggests duopoly prices will be rigid as firms will not trigger a price war by undercutting each other. Real-world examples and criticisms of the kinked demand curve are briefly mentioned.
Monopolistic competition is an imperfect market structure between perfect competition and pure monopoly. It is characterized by many small sellers offering differentiated products, free entry and exit into the market, and firms facing downward-sloping demand curves. In the short run, firms can make profits or losses, but in the long run free entry and exit will cause the number of firms to adjust until all firms earn zero economic profits and price equals average total cost.
The document discusses monopoly market structures. It defines a monopoly as a market with a single seller of a product without close substitutes. It notes that monopolies can arise through government protections, control of critical resources, or large capital requirements. The document then examines the characteristics of monopolies, including price setting behavior to maximize profits where marginal revenue equals marginal cost. It also explores various types of price discrimination strategies monopolies may use.
- Monopolistic competition refers to a market with many firms selling differentiated but similar products. Each firm faces a downward sloping demand curve and can influence prices. There is free entry and exit into the market.
- Oligopoly is characterized by a market with only a few firms selling either homogeneous or differentiated products. The firms are interdependent and can influence prices through their decisions. There is restricted entry into the market.
- Consumer surplus measures the difference between what consumers are willing to pay for a good and the actual price paid, representing the extra satisfaction consumers receive. Producer surplus is the difference between the price producers receive and the lowest price they are willing to supply at.
Pricing and Output Decisions in Monopolynazirali423
1. The document discusses monopoly market structure and pricing decisions. A monopoly is characterized by a single firm that produces an entire market's supply of a good or service with no close substitutes.
2. As the sole provider, a monopoly firm has market power and faces a downward-sloping demand curve. It can influence prices and maximizes profits by reducing output and increasing price compared to competitive firms.
3. There are high barriers to entry for other firms, such as patents, licenses, and economies of scale. These barriers allow the monopoly to maintain economic profits in the long run.
This document summarizes key characteristics of monopolistic competition. In 3 sentences: Firms in monopolistic competition have differentiated but substitutable products, they set price between the monopoly and competitive levels where marginal revenue equals marginal cost to earn normal profits in the long run, and while this leads to higher prices than perfect competition it provides benefits to consumers like variety and innovation.
A document outlines key concepts regarding monopoly, including:
1) A monopoly is characterized by a single seller in the market with no close substitutes who acts as a price maker and can block entry of new competitors.
2) A monopoly faces a downward sloping demand curve and can only increase sales by lowering price across all units sold. As a result, marginal revenue is always below price.
3) A profit-maximizing monopoly will produce at the quantity where marginal revenue equals marginal cost and charge the price dictated by the demand curve at that quantity of output.
Macro Economics
For downloading this contact- bikashkumar.bk100@gmail.com
Prepared by Students of University of Rajshahi
Tanvir Ahmed
Md Mamun Islam
Md Shahidul Islam
Anjon Mojumder
Sadia Afrin
This document discusses monopolistic competition, which assumes many producers and consumers, slight product differentiation, producers that have some control over price as "price makers," and low barriers to entry and exit. Examples of industries with monopolistic competition include shoe repairs, taxis, coffee shops, hair salons, dry cleaners, and bars. Under monopolistic competition in the short run, firms have downward sloping demand curves and will produce at the quantity where marginal revenue equals marginal cost to maximize profits, earning supernormal profits when price is above average cost.
This document discusses monopoly power in markets. It defines a pure monopolist as a single supplier that dominates an entire market with 100% concentration. In reality, a working monopoly is deemed to be any firm with over 25% market share, while a dominant firm has at least 40% share. Monopolies can lead to higher prices and lower output compared to competitive markets. However, monopoly power also allows firms to invest profits into research and development. There are economic arguments both for and against monopolies, and intervention may or may not be effective depending on the specific market.
The document discusses production functions and their importance in managerial decision making. It covers topics such as the relationship between inputs and outputs, total product, average product, marginal product, short-run and long-run production functions, returns to scale, and examples of how production functions are used for capacity planning and in various industries. Estimating production functions using statistical methods and examples of common production function forms are also summarized.
Mba1014 consumers markets elasticity 040513Stephen Ong
This document provides an overview of consumer behavior and elasticity concepts for managerial economics. It discusses factors that influence consumer behavior like tastes, preferences and budget constraints. It explains consumer decision making using indifference curves and how preferences can be represented by utility functions. It also covers elasticity concepts like price elasticity, cross elasticity and income elasticity. The document is intended to help understand how consumer choices are made and how elasticity impacts business revenues.
This document provides an overview of perfect competition, including market structure characteristics, pricing and output decisions, and profit maximization. It defines perfect competition as having many small firms producing identical products, free entry and exit into the market, and firms being price takers. The summary is as follows:
1. Under perfect competition, firms are price takers and maximize profits by producing where price equals marginal cost.
2. The demand curve for an individual firm is perfectly elastic, meaning it faces the market price and can sell all it wishes at that price.
3. In the short run, a competitive firm maximizes profits by choosing the quantity where marginal revenue (equal to price) equals marginal cost, yielding maximum profit
Mba1014 global economic environment 200413Stephen Ong
This document discusses globalization and its impact on businesses. It begins with an introduction to globalization and defining it as the deepening interdependence between countries through increased cross-border trade and financial flows. It then provides statistics on major economies and discusses factors driving globalization like declining trade barriers and technological advances. The document also covers debates around globalization, how it affects companies, and challenges they face in the global marketplace.
Mba1014 macro economic environment 200413Stephen Ong
This document provides an overview of macroeconomics and the macroeconomic environment. It discusses key topics such as the components of the economy, economic growth, productivity, and macroeconomic performance measures. The circular flow model and factors that influence economic growth like savings, investment, expectations and shocks are also examined. Macroeconomic objectives and how performance is measured using indicators like GDP, unemployment and inflation are outlined.
The document discusses supply, demand, and equilibrium in markets. It defines supply and demand, and explains how non-price factors can cause shifts in supply and demand curves. Market equilibrium occurs when quantity demanded equals quantity supplied at the equilibrium price. The document then analyzes how changes in supply and demand curves impact equilibrium price and quantity in both the short-run and long-run using comparative statics analysis. It concludes by discussing how managers must understand supply and demand forces to effectively operate in markets.
1) The document discusses various concepts in microeconomics including monopoly, monopolistic competition, and price discrimination.
2) Under monopoly, a profit-maximizing firm will produce the quantity where marginal revenue equals marginal cost. This maximizes profits.
3) Under monopolistic competition, firms produce differentiated products and free entry leads to zero economic profits in the long-run. However, price still exceeds marginal cost, resulting in some deadweight loss.
4) Price discrimination allows firms to charge different prices to different customers. Perfect first-degree price discrimination involves charging each customer their reservation price. This maximizes a firm's profits.
This document discusses price and output determination under monopolistic competition. It contains the following key points:
1. Firms under monopolistic competition aim to maximize profits by adjusting price and output based on demand and cost conditions.
2. Individual firm equilibrium occurs where marginal revenue equals marginal cost, allowing the firm to make supernormal profits or losses depending on demand and costs.
3. Group equilibrium results from the interaction of many firms producing close substitutes, with uniform demand and cost curves across the industry leading to an equilibrium with normal profits.
This document discusses market pricing decisions and market structures using Porter's model. It covers the key market structures of perfect competition, monopoly, monopolistic competition, and oligopoly. For each structure, it examines how firms make output and pricing decisions based on factors like demand elasticity, costs, and competitors' actions. It also analyzes the implications of each market structure for public interest, including impacts on prices, output, innovation, and resource allocation. Non-price competition strategies like advertising and product development are also briefly discussed.
Price and Output Determination in Monopolistic Competition.pdfPiyush773215
1. Monopolistic competition refers to a market with many firms selling differentiated but substitutable products. No single firm controls a large portion of the market and firms are price makers rather than price takers.
2. In the short run, firms in monopolistic competition determine price and output where marginal revenue equals marginal cost to maximize profits. This can result in normal profits, supernormal profits, or losses.
3. In the long run, free entry and exit of firms will drive profits down to normal as more firms enter if supernormal profits exist, until profits are eliminated and firms only earn enough to stay in business. The industry reaches equilibrium with all firms earning normal profits.
This document summarizes key concepts related to monopoly, including:
1) A monopoly firm is the sole seller of a product without close substitutes and can set price. It produces where marginal revenue equals marginal cost, resulting in lower output and higher prices than perfect competition.
2) Monopoly power can be measured by the Lerner Index, which is the excess of price over marginal cost as a proportion of price. Monopoly power is greater when demand is less elastic.
3) A monopoly faces a downward sloping demand curve. Changes in costs, demand, or taxes affect price and quantity in complex ways depending on the elasticity of demand.
1. The document discusses market structures, specifically monopoly, including monopoly assumptions, barriers to entry, production decisions, and profit maximization.
2. A monopoly faces the entire market demand curve and can set price above marginal cost to earn profits in both the short- and long-run.
3. While monopolies may lead to economic inefficiency through deadweight loss, a price-discriminating monopoly can help reduce this loss by segmenting customers and charging different prices.
This document provides an overview of monopoly market structure. It defines monopoly as a market with a single seller, no close substitutes for the product, and high barriers to entry. Barriers include legal protections like patents, economies of scale, and ownership of necessary resources. A monopoly faces a downward-sloping demand curve and sets price above marginal cost to maximize profits where marginal revenue equals marginal cost. This results in lower output and higher prices than under perfect competition, reducing consumer surplus and creating deadweight loss.
The document discusses key aspects of monopoly markets including:
- A monopoly is defined as a single seller of a product without close substitutes that controls the entire market.
- Features of monopoly include barriers to entry that allow the firm to be a price maker and make independent output decisions.
- Monopolies can maximize profits in the short run but aim for normal profits in the long run to deter new competition.
- Monopolies are economically inefficient as they produce at lower output levels than would be optimal, resulting in deadweight loss.
10. market structure and pricing practices 130119101444-phpapp01malikjameel1986
The document discusses different market structures including perfect competition, monopoly, monopolistic competition, oligopoly, and cartels. It provides details on key features, pricing behaviors, and equilibrium conditions for each market structure. Perfect competition is defined by many buyers and sellers, homogenous products, and price being determined by supply and demand. A monopoly grants a single seller complete market control to set price. Monopolistic competition features product differentiation while allowing long run equilibrium with no profits. Oligopoly relies on interdependent actions among a small number of large firms. Cartels explicitly fix prices through collusive agreements.
Microeconomics mainly deals with an individual’s behavior and decisions that affect the demand and supply of goods and services. www.unitedworld.edu.in
This document provides an overview of different market structures, including perfect competition, monopoly, monopolistic competition, and oligopoly. It defines key characteristics of each market structure and how pricing and profit maximization work. Specifically:
1. Perfect competition is defined by many buyers and sellers, homogeneous products, and firms as price takers. Equilibrium price is determined by the intersection of supply and demand.
2. A monopoly has a single seller and many buyers for a unique product without close substitutes. A monopolist can influence price by restricting output to maximize profits.
3. Other market structures like oligopoly, monopolistic competition, and duopoly are discussed in less detail.
The document summarizes key concepts about monopoly market structure:
1) A monopoly is characterized by a single seller, significant barriers to entry, and no close substitutes for the product. It faces a downward-sloping demand curve and can influence prices.
2) In the short-run, a monopoly will produce where marginal revenue equals marginal cost to maximize profits, earning normal profits, supernormal profits, or losses.
3) In the long-run, the monopoly may adjust its scale of production to maximize profits or minimize losses. It can earn economic profits but also imposes social costs like deadweight loss.
4) The document also discusses price discrimination, where a monopoly charges different prices for
The document summarizes key concepts about monopoly market structure:
1) A monopoly is characterized by a single seller, significant barriers to entry, and no close substitutes for the product. It faces a downward-sloping demand curve and sets price to maximize profit.
2) In the short-run, a monopoly will produce where marginal revenue equals marginal cost to maximize profits, earning normal profits, supernormal profits, or losses.
3) In the long-run, the monopoly may adjust its scale of production to maximize profits or minimize losses. It can potentially earn economic profits in the long-run through barriers to entry.
4) A monopoly also creates deadweight loss and may engage in rent
This PPT deals with what is monopoly, the monopoly power, the sources of monopoly power, the social costs of monopoly power, monopsony, its power and the limiting power
The document discusses different market structures including perfect competition, monopoly, monopolistic competition, and oligopoly. It provides definitions and key assumptions of each market structure. For perfect competition, it describes characteristics like numerous buyers and sellers, homogeneous products, free entry and exit. It also discusses equilibrium price and output determination under perfect competition. For monopoly, it discusses sources of market imperfections and how revenues are determined. It provides a comparison of monopoly and perfect competition.
1) The document discusses key concepts about monopoly, including why monopolies arise due to barriers to entry, how monopolists determine price and quantity differently than competitive firms by equating marginal revenue and marginal cost, and the welfare costs of monopoly markets.
2) It provides examples of monopoly, including DeBeers' control of diamonds and patents granting temporary monopoly power. Price discrimination strategies are also examined.
3) Government policies for dealing with monopolies include promoting competition, regulating prices, and in some cases public ownership of monopolies.
This document discusses monopoly market structure. A monopoly exists when a single firm is the sole producer of a product with no close substitutes. Barriers to entry like ownership of key resources or government protection allow monopolies to exist. Unlike competitive firms, monopolies are price makers and set marginal revenue equal to marginal cost to maximize profits. This results in lower output and higher prices than under perfect competition, creating welfare losses. Monopolies can further increase profits through price discrimination by charging different prices to different customer groups. Policymakers address monopoly inefficiencies through various regulatory approaches.
Chapter 2 detailed on market structures.pptnatan82253
This document discusses market structures and pricing under perfect competition and monopoly. It begins by defining key economic concepts like price, market structures, and competitiveness. It then examines the characteristics and profit maximization process of perfectly competitive firms in both the short-run and long-run. Key points are that competitive firms are price-takers and produce where price equals marginal cost. The document also analyzes monopoly market structure, noting that monopolists face downward sloping demand and are price-setters that produce where marginal revenue equals marginal cost to maximize profits. Barriers to entry allow monopolies to earn economic profits in the long-run.
This document discusses the key features and assumptions of perfect competition. It defines perfect competition as a market structure with a large number of small firms, homogeneous products, free entry and exit, and perfect information. Under these conditions, each firm is a price taker and demands its output at the market price. The document then examines the conditions for a firm and industry to be in both short-run and long-run equilibrium under perfect competition. In short-run equilibrium, a firm produces where marginal cost equals marginal revenue. In long-run equilibrium, all firms earn only normal profits.
The document discusses steps in assessing the viability of a business venture or commercializing a new technology. It outlines key questions to consider, such as whether the entrepreneur has experience launching businesses, if the venture appears profitable, and if the entrepreneur is capable of bringing the product to market. Financial modeling approaches are presented, including break-even analysis to determine sales needed to cover costs. Industry competitiveness is also an important factor to assess. The overall goal is to evaluate if a venture has sufficient potential for profit to merit further investment of time and resources.
This document outlines a workshop on market needs analysis, which is part of the process of discovering a potential one million dollar business idea. The workshop agenda covers identifying customer segments, perceptual mapping, marketing mix, competitor analysis, and macro trends analysis. The document provides an overview of how to conduct a market needs analysis to determine if a product meets a clear market demand. It discusses identifying product uniqueness, competition, customer requirements, barriers to entry, distribution channels, and pricing criteria. Examples are given on perceptual mapping and segmentation for car and smartphone ownership. Tools like the marketing mix, competitor analysis grid, PESTEL analysis, and force field analysis are presented as ways to evaluate market opportunities and trends.
The document outlines the agenda and content for a workshop on technology analysis and commercialization. It introduces the Innovation SPACETM technology commercialization model, which involves 12 stages across 6 phases from concept to business maturity. The workshop will cover assessing the technical attributes of an innovation versus its value proposition, innovation mapping, and analyzing innovation projects based on attractiveness and effort required. It emphasizes that during the technology analysis stage, it is important to determine if a product is new, unique, technically feasible, and offers significant advantages over existing solutions by researching patents, literature, and speaking with experts.
This document outlines the agenda and content for a workshop on technology commercialization. It introduces the Innovation SPACETM technology commercialization model, which consists of 6 phases from concept to domination. Phase 1, the concept phase, includes discovering if a new technology or product is unique, technically feasible, and has market needs. Step 1 of this phase is a technology analysis to determine these attributes. The document then discusses key questions for the technology analysis, common innovator delusions, an example value proposition canvas, and frameworks for mapping innovations and prioritizing projects based on attractiveness vs. effort required.
The document discusses step 3 of stage 1 in a technology commercialization model. Step 3 is the venture assessment, which determines if a product or venture opportunity will be profitable. It involves questions like whether to license the technology or pursue commercialization yourself, and if pursuing it yourself, what resources and experts are required. The ultimate goal of step 3 is to assess if the venture will generate sufficient return to justify the investment risks.
The document discusses market needs analysis, which is step 2 of the innovation commercialization process. It aims to determine if a product meets a clear market demand or solves a problem. Key questions in market needs analysis include identifying the product's uniqueness, competition, customer requirements, potential barriers to market entry, distribution channels, and pricing criteria. Understanding market needs helps qualify the market opportunity for a product concept in the early stages of development.
This document outlines a technology commercialization model with 18 steps organized into 6 phases: Concept, Creation, Design, Deployment, Delivery, and Domination. Step 1 is a Technology Analysis which involves determining if a product is new, unique, technically feasible, and offers advantages over existing solutions. Key questions for Step 1 include researching patents, technologies, and assessing the product's benefits compared to existing solutions. The document also discusses technology adoption curves, disruptive innovations, and mapping products on an innovation matrix based on their technology capabilities and business models.
Mod001093 german sme hidden champions 120415Stephen Ong
This document discusses Germany's "Mittelstand" firms, which are small-to-medium sized companies that are leaders in their niche industries. These "Hidden Champion" firms account for over 50% of Germany's exports and GDP. They are characterized by a focus on a narrow market segment, innovation, high product quality, strong corporate culture and leadership. The document examines how these firms have grown internationally in recent decades, establishing foreign subsidiaries and manufacturing plants in emerging markets. It provides the example of Alfred Kaercher GmbH & Co KG, a leading manufacturer of cleaning machines founded in 1935 that has become a global company with over 10,000 employees across 160 countries.
- The document discusses linear programming models and their use in business analytics and decision making.
- It provides an overview of linear programming, including its basic assumptions, requirements, and how to formulate linear programming problems.
- As an example, it formulates the linear programming problem of Flair Furniture Company, which seeks to maximize profit by determining the optimal production mix of tables and chairs given resource constraints.
- Graphical and Excel solutions to the Flair Furniture problem are presented to illustrate how to solve linear programming problems.
Family-run businesses make up a significant portion of the global economy. They employ between 15-59% of the workforce and generate 12-59% of gross national product in some countries. However, family firms face challenges in long-term sustainability as only 30% are transferred to the second generation and just 13% survive to the third generation. While family involvement provides strengths like experience, resources and stability, it can also create weaknesses if family objectives are prioritized over business objectives. There is no consensus on how to define family firms but definitions generally center around family ownership and management.
Gs503 vcf lecture 8 innovation finance ii 060415Stephen Ong
This document discusses binomial trees, game theory, and R&D valuation. It begins by explaining binomial trees and how they can be used to value options using the Cox-Ross-Rubinstein model. It then discusses game theory, including the prisoner's dilemma example and concepts like Nash equilibrium. Finally, it provides examples of how binomial trees and game theory can be applied to value R&D projects.
Gs503 vcf lecture 7 innovation finance i 300315Stephen Ong
This document discusses financing innovation through R&D and the use of Monte Carlo simulation and real options analysis. It begins by looking at typical sources of R&D funding in the US and definitions of basic research, applied research, and development. It then discusses challenges in financing long-term projects like pharmaceutical R&D. Strategic alliances and licensing are presented as major sources of funding for small biotech companies. The document introduces tools like event trees, decision trees, and Monte Carlo simulation that can be used to evaluate projects with uncertainty. It explains how these tools relate to venture capital valuation of companies with significant R&D components.
This document provides an overview of regression models and their use in business analytics. It discusses simple and multiple linear regression models, how to develop regression equations from sample data, and how to interpret key outputs like the slope, intercept, coefficient of determination, and correlation coefficient. Regression analysis is presented as a valuable tool for managers to understand relationships between variables and predict outcomes. The document outlines the key steps in regression including developing scatter plots, calculating regression equations, and measuring the fit of regression models.
This document discusses sampling, hypothesis testing, and regression. It covers topics such as using samples to estimate population parameters, sampling distributions, calculating confidence intervals for means and proportions, hypothesis testing using sampling distributions, and simple linear regression. The key points are that sampling is used for statistical inference about populations, sampling distributions describe the variation in sample statistics, and confidence intervals and hypothesis tests allow making inferences with a known degree of confidence or significance.
This document discusses intrapreneurship and entrepreneurship within large organizations. It defines intrapreneurs as individuals within large companies who show entrepreneurial traits by being a source of creativity and new ideas. The document compares the attributes of managers, entrepreneurs, and intrapreneurs. It also discusses how entrepreneurship can occur in different phases of organizational growth and examines dimensions of entrepreneurship within firms like strategic orientation, commitment to opportunities, and entrepreneurial culture. The document provides characteristics of an environment that encourages entrepreneurship and the leadership traits of corporate entrepreneurs.
Gs503 vcf lecture 6 partial valuation ii 160315Stephen Ong
The document discusses partial valuation and complex structures related to venture capital financing. It provides examples of:
1) Participating convertible preferred stock and how to calculate implied valuations both pre- and post-investment rounds.
2) A management carve-out structure where management receives 10% of exit proceeds up to $5 million as part of a $12 million Series E investment.
3) A second example of a management carve-out where management is promised $5 million if the company exits for at least $50 million.
Gs503 vcf lecture 5 partial valuation i 140315Stephen Ong
This document discusses partial valuations related to option pricing, preferred stock, and later series investments. It begins by defining options and differentiating between call and put options. It then covers the Black-Scholes option pricing model and its assumptions. Next, it compares the valuation of redeemable and convertible preferred stock, discussing liquidation preferences and breakeven valuations. Finally, it examines later round investments such as Series B, C, and beyond, providing examples of how preferred stock is structured and valued across multiple investment rounds.
This document provides an overview of entrepreneurship and small and medium enterprises (SMEs) from a national and international perspective. It examines the economic significance of startups and SMEs, comparing their role in employment and GDP across countries. It also reviews common challenges faced by SMEs, such as low survival rates, regulatory burdens, and difficulties obtaining financing for growth. Government policies to support SMEs through reduced taxes, regulations, and aid programs are discussed.
Mod001093 from innovation business model to startup 140315Stephen Ong
The document discusses the innovation process from business model to startup. It begins by outlining the learning objectives of evaluating entrepreneurial ideas, demonstrating potential implementation through a business model, and identifying elements of an effective startup plan. It then covers generating ideas into opportunities by linking supply and demand, and recognizing opportunities through observing trends, solving problems, and finding marketplace gaps. Key aspects of opportunity recognition like prior experience, cognitive factors, social networks, and creativity are examined. The full opportunity recognition process is depicted. Finally, developing an effective mission statement for a social enterprise is discussed.
japanese language course in delhi near meheyfairies7
Next is the Nihon Language Academy in East Delhi, renowned for its comprehensive curriculum and interactive teaching methods. They boast a faculty of experienced educators with a blend of both Indian and Japanese nationals. The academy provides extensive support for JLPT exam preparation along with personalized tutoring sessions if needed. Nihon Language Academy also arranges exchange programs with partner institutes in Japan, which provides students an opportunity to experience Japanese culture and language first-hand.
SATTA MATKA DPBOSS KALYAN MATKA RESULTS KALYAN CHART KALYAN MATKA MATKA RESULT KALYAN MATKA TIPS SATTA MATKA MATKA COM MATKA PANA JODI TODAY BATTA SATKA MATKA PATTI JODI NUMBER MATKA RESULTS MATKA CHART MATKA JODI SATTA COM INDIA SATTA MATKA MATKA TIPS MATKA WAPKA ALL MATKA RESULT LIVE ONLINE MATKA RESULT KALYAN MATKA RESULT DPBOSS MATKA 143 MAIN MATKA KALYAN MATKA RESULTS KALYAN CHART
SATTA MATKA DPBOSS KALYAN MATKA RESULTS KALYAN CHART KALYAN MATKA MATKA RESULT KALYAN MATKA TIPS SATTA MATKA MATKA COM MATKA PANA JODI TODAY BATTA SATKA MATKA PATTI JODI NUMBER MATKA RESULTS MATKA CHART MATKA JODI SATTA COM INDIA SATTA MATKA MATKA TIPS MATKA WAPKA ALL MATKA RESULT LIVE ONLINE MATKA RESULT KALYAN MATKA RESULT DPBOSS MATKA 143 MAIN MATKA KALYAN MATKA RESULTS KALYAN CHART
SATTA MATKA DPBOSS KALYAN MATKA RESULTS KALYAN CHART KALYAN MATKA MATKA RESULT KALYAN MATKA TIPS SATTA MATKA MATKA COM MATKA PANA JODI TODAY BATTA SATKA MATKA PATTI JODI NUMBER MATKA RESULTS MATKA CHART MATKA JODI SATTA COM INDIA SATTA MATKA MATKA TIPS MATKA WAPKA ALL MATKA RESULT LIVE ONLINE MATKA RESULT KALYAN MATKA RESULT DPBOSS MATKA 143 MAIN MATKA KALYAN MATKA RESULTS KALYAN CHART
Adani Group Requests For Additional Land For Its Dharavi Redevelopment Projec...Adani case
It will bring about growth and development not only in Maharashtra but also in our country as a whole, which will experience prosperity. The project will also give the Adani Group an opportunity to rise above the controversies that have been ongoing since the Adani CBI Investigation.
Enabling Digital Sustainability by Jutta EcksteinJutta Eckstein
This is a New Zealand wide meetup event with meetup groups from Auckland, Wellington and Christchurch attending and open to anyone with an interest in digital sustainability or agile. All welcome. Joke, this is how it started. Jutta is now also available in Germany, i.e. hosted by Berlin/Brandenburg
According to the World Economic Forum, digital technologies can help reduce global carbon emissions by up to 15%. However, digitalization also comes with some challenges. Thus, if we want to make a positive impact by increasing sustainability, we need to address challenges like the digital divide, energy consumption of IT, or the rise of electronic waste. In this talk, I want to explore how Agile can help to leverage Digital Sustainability.
Satta matka fixx jodi panna all market dpboss matka guessing fixx panna jodi kalyan and all market game liss cover now 420 matka office mumbai maharashtra india fixx jodi panna
Call me 9040963354
WhatsApp 9040963354
SATTA MATKA DPBOSS KALYAN MATKA RESULTS KALYAN CHART KALYAN MATKA MATKA RESULT KALYAN MATKA TIPS SATTA MATKA MATKA COM MATKA PANA JODI TODAY BATTA SATKA MATKA PATTI JODI NUMBER MATKA RESULTS MATKA CHART MATKA JODI SATTA COM INDIA SATTA MATKA MATKA TIPS MATKA WAPKA ALL MATKA RESULT LIVE ONLINE MATKA RESULT KALYAN MATKA RESULT DPBOSS MATKA 143 MAIN MATKA KALYAN MATKA RESULTS KALYAN CHART
The Enigmatic Gemini: Unveiling the Dual Personalitiesmy Pandit
Explore the fascinating world of the Gemini Zodiac Sign, where duality reigns supreme. Discover the personality traits, important dates, and horoscope insights that define the ever-curious and communicative Gemini.
Adani Group's Active Interest In Increasing Its Presence in the Cement Manufa...Adani case
Time and again, the business group has taken up new business ventures, each of which has allowed it to expand its horizons further and reach new heights. Even amidst the Adani CBI Investigation, the firm has always focused on improving its cement business.
Adani Group's Active Interest In Increasing Its Presence in the Cement Manufa...
Mba1014 monopoly 220513
1. Go Global !
Managerial Economics :
Monopoly
By
Stephen Ong
Visiting Fellow, Birmingham City University
Visiting Professor, College of Management,
Shenzhen University
May 2013
3. Learning Objectives
To understand market power,
monopoly and monopsony
To explain how the MR=MC rule
helps a monopoly to determine its
optimum
To discuss government regulation
and antitrust laws
To understand price discrimination
in monopoly markets
6. Firms With Market Power
The ability of a firm to
influence the prices of its
products and develop
other competitive
strategies that enable it
to earn large profits over
longer periods of time.
7. The Monopoly Model
A market structure
characterized by a single
firm producing a product
with no close substitutes.
8. Monopoly Model - Graphical
P
Q
PM
ATCM
QM
D
MR
MC
ATCP
Q
PM
QM
ATCM
D
MR
MC
ATC
PROFIT
LOSS
9. Comparing Monopoly and Perfect
Competition
The Perfectly
Competitive Firm
At QPC :
MR = MC
P = ATC
P = MC
Minimum Point of
ATC Curve
Price-Taker
Firm Has Supply
Curve
The Monopoly Firm
At QM :
MR = MC
P > ATC
P > MC
Not at Minimum
Point of ATC
Price-Searcher
Firm Has No Supply
Curve
10. Comparing Monopoly and Perfect
Competition - Graphical
P
Q
PM
QM
D
MR
MC
ATC
D = P = MRPC
QC
ATC
MC
11. Another Look at Monopoly
vs. Perfect Competition
PM
PC
QCQM
AC=MC
D
MR
$
Q
12. Sources of Market Power
Economies of scale
Barriers created by
government
Input barriers
Brand loyalties
Consumer lock-in and
switching costs
Network externalities
13. Economies of Scale
Economies of scale can
act as a barrier to entry
in different industries
because only large-scale
firms can achieve the
cost-reduction benefits
of these economies.
15. Input Barriers
Other barriers to entry
include control over raw
materials or other key
inputs in a production
process and barriers in
financial capital markets.
16. Brand Loyalties
The creation of brand
loyalties through
advertising and other
marketing efforts is a
strategy that many
managers use to create
and maintain market
power.
17. Consumer Lock-In and
Switching Costs
Barriers to entry can also
result if consumers
become locked into
certain types or brands
of products and would
incur substantial
switching costs if they
changed.
19. Examples of Shifting
Market Power
Shifting Demand
for Kleenex
Home Depot and
Customer
Service
Borders
Bookstores’
Online Strategy
20. Monopoly
Market with only one seller.
Monopsony
Market with only one buyer.
Market power
Ability of a seller or buyer to affect
the price of a good.
21. Monopoly
Average Revenue and Marginal Revenue
Marginal revenue : Change in revenue resulting from a one-unit
increase in output.
TABLE 1 TOTAL, MARGINAL, AND AVERAGE REVENUE
PRICE
(P)
QUANTITY
(Q)
TOTAL
REVENUE
(R)
MARGINAL
REVENUE
(MR)
AVERAGE
REVENUE
(AR)
$6 0 $0 — —
5 1 5 $5 $5
4 2 8 3 4
3 3 9 1 3
2 4 8 1 2
1 5 5 3 1
Consider a firm facing the following demand curve: P = 6 Q
23. PROFIT IS MAXIMIZED WHEN
MARGINAL REVENUE
EQUALS MARGINAL COST
The Monopolist’s Output Decision
Q* is the output level at which
MR = MC.
If the firm produces a smaller
output—say, Q1—it sacrifices
some profit because the extra
revenue that could be earned
from producing and selling
the units between Q1 and Q*
exceeds the cost of producing
them.
Similarly, expanding output
from Q* to Q2 would reduce
profit because the additional
cost would exceed the
additional revenue.
24. We can also see algebraically that Q* maximizes
profit. Profit π is the difference between revenue
and cost, both of which depend on Q:
As Q is increased from zero, profit will increase until it
reaches a maximum and then begin to decrease. Thus
the profit-maximizing Q is such that the incremental
profit resulting from a small increase in Q is just zero
(i.e., Δπ /ΔQ = 0). Then
But ΔR/ΔQ is marginal revenue and ΔC/ΔQ is
marginal cost. Thus the profit-maximizing
condition is that
25. EXAMPLE OF PROFIT
MAXIMIZATION
Part (a) shows total revenue R, total cost C,
and profit, the difference between the two.
Part (b) shows average and marginal
revenue and average and marginal cost.
Marginal revenue is the slope of the total
revenue curve, and marginal cost is the
slope of the total cost curve.
The profit-maximizing output is Q* = 10, the
point where marginal revenue equals
marginal cost.
At this output level, the slope of the profit
curve is zero, and the slopes of the total
revenue and total cost curves are equal.
The profit per unit is $15, the difference
between average revenue and average
cost. Because 10 units are produced, total
profit is $150.
26. A Rule of Thumb for Pricing
Note that the extra revenue from an incremental unit of quantity,
Δ(PQ)/ΔQ, has two components:
1. Producing one extra unit and selling it at price P brings in revenue
(1)(P) = P.
2. But because the firm faces a downward-sloping demand curve,
producing and selling this extra unit also results in a small drop in
price ΔP/ΔQ, which reduces the revenue from all units sold (i.e., a
change in revenue Q[ΔP/ΔQ]).Thus,
With limited knowledge of average and marginal revenue, we can
derive a rule of thump that can be more easily applied in practice.
First, write the expression for marginal revenue:
27. (Q/P)(ΔP/ΔQ) is the reciprocal of the elasticity of
demand, 1/Ed, measured at the profit-maximizing
output, and
Now, because the firm’s objective is to maximize profit,
we can set marginal revenue equal to marginal cost:
which can be rearranged to give us
Equivalently, we can rearrange this equation to express
price directly as a markup over marginal cost:
28. ASTRA-MERCK PRICES PRILOSEC
In 1995, Prilosec, represented a new generation of anti-
ulcer medication. Prilosec was based on a very different
biochemical mechanism and was much more effective
than earlier drugs.
By 1996, it had become the best-selling drug in the world
and faced no major competitor.
Astra-Merck was pricing Prilosec at about $3.50 per daily
dose. The marginal cost of producing and packaging
Prilosec is only about 30 to 40 cents per daily dose. The
price elasticity of demand, ED, should be in the range of
roughly −1.0 to −1.2.
Setting the price at a markup exceeding 400 percent
over marginal cost is consistent with our rule of thumb for
pricing.
29. Shifts in Demand
A monopolistic market has no supply curve. In other
words, there is no one-to-one relationship between price
and the quantity produced.
The reason is that the monopolist’s output decision depends
not only on marginal cost but also on the shape of the
demand curve.
As a result, shifts in demand do not trace out the series of
prices and quantities that correspond to a competitive
supply curve. Instead, shifts in demand can lead to changes
in price with no change in output, changes in output with no
change in price, or changes in both price and output.
Shifts in demand usually cause changes in both price and
quantity. A competitive industry supplies a specific quantity
at every price. No such relationship exists for a monopolist,
which, depending on how demand shifts, might supply
several different quantities at the same price, or
the same quantity at different prices.
30. SHIFTS IN DEMAND
Shifting the demand curve
shows that a monopolistic
market has no supply curve—
i.e., there is no one-to-one
relationship between price and
quantity produced. In (a), the
demand curve D1 shifts to new
demand curve D2. But the new
marginal revenue curve MR2
intersects marginal cost at the
same point as the old marginal
revenue curve MR1. The profit-
maximizing output therefore
remains the same, although
price falls from P1 to P2. In (b),
the new marginal revenue
curve MR2 intersects marginal
cost at a higher output level
Q2. But because demand is
now more elastic, price
remains the same.
31. THE DEMAND FOR TOOTHBRUSHES
Monopoly Power
Part (a) shows the market
demand for toothbrushes.
Part (b) shows the demand
for toothbrushes as seen by
Firm A.
At a market price of $1.50,
elasticity of market demand
is −1.5.
Firm A, however, sees a
much more elastic demand
curve DA because of
competition from other
firms. At a price of $1.50,
Firm A’s demand elasticity is
−6. Still, Firm A has some
monopoly power: Its profit-
maximizing price is $1.50,
which exceeds marginal
cost.
32. ELASTICITIES OF DEMAND FOR SOFT DRINKS
Soft drinks provide a good example of the difference between a
market elasticity of demand and a firm’s elasticity of demand.
In addition, soft drinks are important because their consumption
has been linked to childhood obesity; there could be health
benefits from taxing them.
A recent review of several statistical studies found that the
market elasticity of demand for soft drinks is between −0.8 and
−1.0.6 That means that if all soft drink producers increased the
prices of all of their brands by 1 percent, the quantity of soft
drinks demanded would fall by 0.8 to 1.0 percent.
The demand for any individual soft drink, however, will be much
more elastic, because consumers can readily substitute one
drink for another. Although elasticities will differ across different
brands, studies have shown that the elasticity of demand for,
say, Coca Cola is around −5.7 In other words, if the price of Coke
were increased by 1 percent but the prices of all other soft
drinks remained unchanged, the quantity of Coke demanded
would fall by about 5 percent. Students—and business people—
sometimes confuse the market elasticity of demand with the firm
(or brand) elasticity of demand.
33. ELASTICITY OF DEMAND AND PRICE MARKUP
The Rule of Thumb for Pricing
The markup (P − MC)/P is equal to minus the inverse of the elasticity of
demand. If the firm’s demand is elastic, as in (a), the markup is small and the
firm has little monopoly power.
The opposite is true if demand is relatively inelastic, as in (b).
34. MARKUP PRICING: SUPERMARKETS TO
DESIGNER JEANS
Although the elasticity of market demand for food is small
(about −1), no single supermarket can raise its prices very
much without losing customers to other stores.
The elasticity of demand for any one supermarket is often as large as
−10. We find P = MC/(1 − 0.1) =MC/(0.9) = (1.11)MC.
The manager of a typical supermarket should set prices about 11
percent above marginal cost.
Small convenience stores typically charge higher prices
because its customers are generally less price sensitive.
Because the elasticity of demand for a convenience store is about −5,
the markup equation implies that its prices should be about 25 percent
above marginal cost.
With designer jeans, demand elasticities in the range of −2
to −3 are typical. This means that price should be 50 to
100 percent higher than marginal cost.
35. THE PRICING OF VIDEOS
When the market for videos was young, producers had no good
estimates of the elasticity of demand. As the market matured,
however, sales data and market research studies put pricing
decisions on firmer ground. By the 1990s, most producers had
lowered prices across the board.
TABLE 2 RETAIL PRICES OF VIDEOS IN 1985 AND 2011
1985 2011
TITLE
RETAIL PRICE
($) TITLE
RETAIL PRICE
($)
VHS DVD
Purple Rain $29.98 Tangled $20.60
Raiders of the Lost Ark $24.95
Harry Potter and the
Deathly Hallows, Part 1 $20.58
Jane Fonda Workout $59.95 Megamind $18.74
The Empire Strikes Back $79.98 Despicable Me $14.99
An Officer and a
Gentleman $24.95 Red $27.14
Star Trek: The Motion
Picture $24.95 The King’s Speech $14.99
Star Wars $39.98 Secretariat $20.60
36. VIDEO SALES
Between 1990 and 1998, lower prices induced consumers to buy
many more videos. By 2001, sales of DVDs overtook sales of VHS
videocassettes. High-definition DVDs were introduced in 2006,
and are expected to displace sales of conventional DVDs. All
DVDs, however, are now being displaced by streaming video.
THE PRICING OF VIDEOS
37. Sources of Monopoly Power
The less elastic its demand curve, the more
monopoly power a firm has. The ultimate
determinant of monopoly power is therefore
the firm’s elasticity of demand.
Three factors determine a firm’s elasticity of demand.
1. The elasticity of market demand. Because the
firm’s own demand will be at least as elastic as market
demand, the elasticity of market demand limits the
potential for monopoly power.
2. The number of firms in the market. If there are many
firms, it is unlikely that any one firm will be able to
affect price significantly.
3. The interaction among firms. Even if only two or three
firms are in the market, each firm will be unable to
profitably raise price very much if the rivalry among
them is aggressive, with each firm trying to capture as
much of the market as it can.
38. If there is only one firm—a pure monopolist—its demand curve
is the market demand curve. In this case, the firm’s degree of
monopoly power depends completely on the elasticity of market
demand.
When several firms compete with one another, the elasticity of
market demand sets a lower limit on the magnitude of the
elasticity of demand for each firm.
A particular firm’s elasticity depends on how the firms compete
with one another, and the elasticity of market demand limits the
potential monopoly power of individual producers.
Because the demand for oil is fairly inelastic (at least
in the short run), OPEC could raise oil prices far above marginal
production cost during the 1970s and early 1980s. Because the
demands for such commodities as coffee, cocoa, tin, and copper
are much more elastic, attempts by producers to cartelize these
markets and raise prices have largely failed. In each case, the
elasticity of market demand limits the potential monopoly power
of individual producers.
1. The Elasticity of Market Demand
39. 2.The Number of Firms
Other things being equal, the monopoly power of
each firm will fall as the number of firms
increases. When only a few firms account for
most of the sales in a market, we say that the
market is highly concentrated.
Barrier to entry
Condition that impedes entry by new competitors.
1. Sometimes there are natural barriers to entry.
2. Patents, copyrights, and licenses
3. Economies of scale may make it too costly for
more than a few firms to supply the entire
market. In some cases, economies of scale may
be so large that it is most efficient for a single
firm—a natural monopoly—to supply the entire
market.
40. 3.The Interaction Among Firms
Firms might compete aggressively, undercutting one
another’s prices to capture more market share, or they
might not compete much. They might even collude (in
violation of the antitrust laws), agreeing to limit
output and raise prices.
Other things being equal, monopoly power is smaller when
firms compete aggressively and is larger when they
cooperate. Because raising prices in concert rather than
individually is more likely to be profitable, collusion can
generate substantial monopoly power.
Remember that a firm’s monopoly power often changes
over time, as its operating conditions (market demand and
cost), its behaviour, and the behaviour of its competitors
change. Monopoly power must therefore be thought of in a
dynamic context. Furthermore, real or potential monopoly
power in the short run can make an industry more
competitive in the long run: Large short-run profits can
induce new firms to enter an industry, thereby reducing
monopoly power over the longer term.
41. The Social Costs of Monopoly Power
DEADWEIGHT LOSS FROM
MONOPOLY POWER
The shaded rectangle and
triangles show changes in
consumer and producer surplus
when moving from competitive
price and quantity, Pc and Qc,
to a monopolist’s price and
quantity, Pm and Qm.
Because of the higher price,
consumers lose A + B
and producer gains A − C. The
deadweight loss is B + C.
Rent Seeking
Spending money in socially unproductive efforts to acquire, maintain, or
exercise monopoly.
We would expect the economic incentive to incur rent-
seeking costs to bear a direct relation to the gains from
monopoly power (i.e., rectangle A minus triangle C.)
42. REGULATING THE PRICE OF
A NATURAL MONOPOLY
A firm is a natural monopoly
because it has economies of
scale (declining average and
marginal costs) over its entire
output range.
If price were regulated to be Pc the
firm would lose money and go out
of business.
Setting the price at Pr yields the
largest possible output consistent
with the firm’s remaining in
business; excess profit is zero.
Natural Monopoly
Firm that can produce the entire output of the market at a
cost lower than what it would be if there were several
firms.
43. Monopsony
Oligopsony Market with only a few buyers.
Monopsony power
Buyer’s ability to affect the price of a good.
Marginal value
Additional benefit derived from purchasing one more
unit of a good.
Marginal expenditure
Additional cost of buying one more unit of a good.
Average expenditure
Price paid per unit of a good.
44. COMPETITIVE BUYER COMPARED TO COMPETITIVE SELLER
In (a), the competitive buyer takes market price P* as given. Therefore,
marginal expenditure and average expenditure are constant and equal;
quantity purchased is found by equating price to marginal value
(demand). In (b), the competitive seller also takes price as given.
Marginal revenue and average revenue are constant and equal;
quantity sold is found by equating price to marginal cost.
45. MONOPSONIST BUYER
The market supply curve is
monopsonist’s average
expenditure curve AE.
Because average expenditure is
rising, marginal expenditure lies
above it.
The monopsonist purchases
quantity Q*m, where marginal
expenditure and marginal value
(demand) intersect.
The price paid per unit P*m is then
found from the average
expenditure (supply) curve.
In a competitive market, price and
quantity, Pc and Qc, are both
higher.
They are found at the point where
average expenditure (supply) and
marginal value (demand) intersect.
46. These diagrams show the close analogy between monopoly and monopsony.
(a) The monopolist produces where marginal revenue intersects marginal cost.
Average revenue exceeds marginal revenue, so that price exceeds marginal
cost.
(b) The monopsonist purchases up to the point where marginal expenditure
intersects marginal value.
Marginal expenditure exceeds average expenditure, so that marginal value
exceeds price.
Monopsony and Monopoly Compared
47. MONOPSONY POWER: ELASTIC VERSUS INELASTIC SUPPLY
Monopsony power depends on the elasticity of supply.
When supply is elastic, as in (a), marginal expenditure and average expenditure
do not differ by much, so price is close to what it would be in a competitive
market.
The opposite is true when supply is inelastic, as in (b).
Monopsony Power
48. Sources of Monopsony Power
ELASTICITY OF MARKET SUPPLY
If only one buyer is in the market—a pure monopsonist—its
monopsony power is completely determined by the elasticity of
market supply. If supply is highly elastic, monopsony power is
small and there is little gain in being the only buyer.
NUMBER OF BUYERS
When the number of buyers is very large, no single buyer can
have much influence over price. Thus each buyer faces an
extremely elastic supply curve, so that the market is almost
completely competitive.
INTERACTION AMONG BUYERS
If four buyers in a market compete aggressively, they will bid up the
price close to their marginal value of the product, and will thus have
little monopsony power. On the other hand, if those buyers compete
less aggressively, or even collude, prices will not be bid up very
much, and the buyers’ degree of monopsony power might be nearly
as high as if there were only one buyer.
49. DEADWEIGHT LOSS FROM
MONOPSONY POWER
The Social Costs of Monopsony Power
The shaded rectangle and
triangles show changes in
buyer and seller surplus
when moving from
competitive price and
quantity, Pc and Qc, to the
monopsonist’s price and
quantity, Pm and Qm.
Because both price and
quantity are lower, there is
an increase in buyer
(consumer) surplus given
by A − B.
Producer surplus falls by
A + C, so there is a
deadweight loss given by
triangles B and C.
50. Bilateral Monopoly
Market with only one seller and one buyer.
It is difficult to predict the price and quantity in a bilateral
monopoly. Both the buyer and the seller are in a bargaining
situation.
Bilateral monopoly is rare. Although bargaining may still be
involved, we can apply a rough principle here: Monopsony
power and monopoly power will tend to counteract each
other. In other words, the monopsony power of buyers will
reduce the effective monopoly power of sellers, and vice
versa.
This tendency does not mean that the market will end up
looking perfectly competitive, but in general,
monopsony power will push price closer to
marginal cost, and monopoly power will
push price closer to marginal value.
51. MONOPSONY POWER IN U.S. MANUFACTURING
The role of monopsony power was investigated to determine the
extent to which variations in price-cost margins could be attributed
to variations in monopsony power. The study found that buyers’
monopsony power had an important effect on the price-cost margins
of sellers.
In industries where only four or five buyers account for all or nearly
all sales, the price-cost margins of sellers would on
average be as much as 10 percentage points lower than in
comparable industries with hundreds of buyers accounting for sales.
Each major car producer in the United States typically buys an individual
part from at least three, and often as many as a dozen, suppliers.
For a specialized part, a single auto company may be the
only buyer.
As a result, the automobile companies have considerable
monopsony power. Not surprisingly, producers of parts
and components usually have little or no monopoly
power.
53. Measures of Market Power
Lerner Index
Cross Price Elasticity of
Demand
Concentration Ratios
The Herfindahl-Hirschman
Index
54. Measuring Monopoly Power :
Lerner Index
Remember the important distinction between a
perfectly competitive firm and a firm with
monopoly power: For the competitive firm,
price equals marginal cost; for the firm with
monopoly power, price exceeds marginal cost.
Lerner Index of Monopoly Power
Measure of monopoly power calculated as excess of price over
marginal cost as a fraction of price.
Mathematically:
This index of monopoly power can also be expressed in terms of
the elasticity of demand facing the firm.
55. The regulation of a monopoly is sometimes based on the rate of return
that it earns on its capital. The regulatory agency determines an allowed
price, so that this rate of return is in some sense “competitive” or “fair.”
Although it is a key element in determining the firm’s rate of return, a
firm’s capital stock is difficult to value. While a “fair” rate of return must
be based on the firm’s actual cost of capital, that cost depends in turn
on the behaviour of the regulatory agency. Regulatory lag is a term
associated with delays in changing regulated prices.
Another approach to regulation is setting price caps based on the
firm’s variable costs. A price cap can allow for more flexibility than rate-
of-return regulation. Under price cap regulation, for example, a firm
would typically be allowed to raise its prices each year (without having
to get approval from the regulatory agency) by an amount equal to the
actual rate of inflation, minus expected productivity growth.
Regulation in Practice
Rate-of-return regulation
Maximum price allowed by a regulatory agency is based on the
(expected) rate of return that a firm will earn.
56. The Effect of a Tax
EFFECT OF EXCISE TAX
ON MONOPOLIST
With a tax t per unit, the
firm’s effective
marginal cost is
increased by the
amount t to MC + t.
In this example, the
increase in price ΔP is
larger than the tax t.
Suppose a specific tax of t dollars per unit is levied, so that the
monopolist must remit t dollars to the government for every unit it
sells. If MC was the firm’s original marginal cost, its optimal
production decision is now given by
57. PRICE
REGULATION
If left alone, a monopolist
produces Qm and charges
Pm.
When the government
imposes a price ceiling of
P1 the firm’s average and
marginal revenue are
constant and equal to P1
for output levels up to Q1.
For larger output levels,
the original average and
marginal revenue curves
apply.
The new marginal
revenue curve is,
therefore, the dark purple
line, which intersects the
marginal cost curve at Q1.
Price Regulation
58. PRICE REGULATION
When price is
lowered to Pc, at the
point where marginal
cost intersects
average revenue,
output increases to
its maximum Qc. This
is the output that
would be produced
by a competitive
industry.
Lowering price
further, to P3, reduces
output to Q3 and
causes a shortage,
Q’3 − Q3.
59. Limiting Market Power:
The Antitrust Laws
Antitrust laws
Rules and regulations prohibiting actions that restrain, or are likely to
restrain, competition.
Excessive market power harms potential purchasers and raises
problems of equity and fairness. In addition, market power reduces
output, which leads to a deadweight loss.
In theory, a firm’s excess profits could be taxed away, but redistribution
of the firm’s profits is often impractical.
To limit the market power of a natural monopoly, such as an electric
utility company, direct price regulation is the answer.
It is important to stress that, while there are limitations
(such as colluding with other firms), in general, it is not
illegal to be a monopolist or to have market power. On the
contrary, we have seen that patent and copyright
laws protect the monopoly positions of firms that
developed unique innovations.
60. Restricting what Firms can do
Parallel conduct
Form of implicit collusion in which one
firm consistently follows actions of
another.
Predatory pricing
Practice of pricing to drive current
competitors out of business and to
discourage new entrants in a market so
that a firm can enjoy higher future
profits.
62. The antitrust laws are enforced in three
ways in USA :
1. Through the Antitrust Division of the
Department of Justice.
2. Through the administrative
procedures of the Federal Trade
Commission.
3. Through private proceedings.
Enforcement of the Antitrust Laws
63. Antitrust in Europe
At first glance, the antitrust laws of the European Union
are quite similar to those of the United States. Article
101 of the Treaty of the European Community concerns
restraints of trade, much like Section 1 of the Sherman
Act.
Article 102, which focuses on abuses of market power
by dominant firms, is similar in many ways to Section 2
of the Sherman Act.
Finally, with respect to mergers, the European Merger
Control Act is similar in spirit to Section 7 of the Clayton
Act.
Nevertheless, there remain a number of procedural and
substantive differences between antitrust laws in
Europe and the United States. Merger evaluations
typically are conducted more quickly in Europe.
Antitrust enforcement has grown rapidly through the
world in the past decade.
64. A PHONE CALL ABOUT PRICES
Robert Crandall, president and CEO of American, made a phone call
to Howard Putnam, president and chief executive of Braniff. It went
like this:
Crandall: I think it’s dumb as hell for Christ’s sake, all right, to sit here
and pound the @!#$%&! out of each other and neither one of us
making a @!#$%&! dime.
Putnam: Well . . .
Crandall: I mean, you know, @!#$%&!, what the hell is the point of it?
Putnam: But if you’re going to overlay every route of American’s on
top of every route that Braniff has—I just can’t sit here and allow you
to bury us without giving our best effort.
Crandall: Oh sure, but Eastern and Delta do the same thing in Atlanta
and have for years.
Putnam: Do you have a suggestion for me?
65. A PHONE CALL ABOUT PRICES
Crandall: Yes, I have a suggestion for you. Raise your @!#$%&! fares
20 percent. I’ll raise mine the next morning.
Putnam: Robert, we. . .
Crandall: You’ll make more money and I will, too.
Putnam: We can’t talk about pricing!
Crandall: Oh @!#$%&!, Howard. We can talk about any @!#$%&! thing
we want to talk about.
Crandall was wrong. Talking about prices and agreeing to fix
them is a clear violation of Section 1 of the Sherman Act.
However, proposing to fix prices is not enough to violate Section 1 of
the Sherman Act: For the law to be violated, the two parties must agree
to collude.
Therefore, because Putnam had rejected Crandall’s proposal, Section
1 was not violated.
66. GO DIRECTLY TO JAIL. DON’T PASS GO
If you become a successful business executive, think
twice before picking up the phone. And if your
company happens to be located in Europe or Asia,
don’t think that will keep you out of a U.S. jail.
For example:
In 1996 Archer Daniels Midland (ADM) and two other
producers of lysine (an animal feed additive) pled guilty to
charges of price fixing. In 1999 three ADM executives were
sentenced to prison terms of two to three years.
In 1999 four of the world’s largest drug and chemical
companies—Hoffman-La Roche of Switzerland,
BASF of Germany, Rhone Poulenc of France, and
Takeda of Japan—pled guilty to fixing the prices of
vitamins sold in the U.S. and Europe. The companies paid
about $1.5 billion in penalties to the U.S. Department of
Justice (DOJ), $1 billion to the European Commission, and
over $4 billion to settle civil suits. Executives from each of
the companies did prison time in the U.S.
67. GO DIRECTLY TO JAIL. DON’T PASS GO
During 2002 to 2009, Horizon Lines engaged in
price fixing with Sea Star Lines (Puerto Rico-based
shipping companies). Five executives got prison
terms ranging from one to four years.
Eight companies, mostly in Korea and Japan, fixed
DRAM (memory chip) prices from 1998 to 2002. In
2007, 18 executives from these companies were
sentenced to prison terms in the United States.
In 2009, five companies pled guilty to fixing prices
of LCD displays during 2001-2006. 22 executives
received prison sentences in the United States (on
top of $1 billion in fines).
In 2011, two companies were convicted of fixing
prices and rigging bids for ready-mix concrete in
Iowa. One executive was sentenced to one year in
prison, another to four years.
68. THE UNITED STATES AND THE EUROPEAN
UNION VERSUS MICROSOFT
Over the past two decades Microsoft has grown to become the
largest computer software company in the world, and has
dominated the office productivity market. Under the antitrust laws
of the United States and the European Union, efforts by firms to
restrain trade or to engage in activities that inappropriately
maintain monopolies are illegal. Did Microsoft engage in
anticompetitive, illegal practices?
In 1998, the U.S. government said yes; Microsoft disagreed.
The Antitrust Division of the U.S. DOJ filed suit, claiming that
Microsoft had illegally bundled its Internet browser, Internet
Explorer, with its operating system for the purpose of maintaining
its dominant operating system monopoly. Following an eight-
month trial that was hard-fought on a range of economic issues,
the District Court found that Microsoft did have monopoly power in
the market for PC operating systems, which it had maintained
illegally in violation of Section 2 of the Sherman Act.
The U.S. case was ultimately settled in 2004, with (among other
things) Microsoft agreeing to give computer manufacturers
(1) the ability to offer an operating system without Internet
Explorer and (2) the option of loading competing browser
Programs on the PCs that they sell.
69. THE UNITED STATES AND THE EUROPEAN
UNION VERSUS MICROSOFT
Microsoft’s problems did not end with the U.S. settlement,
however. In 2004, the European Commission ordered
Microsoft to pay $794 million in fines for its anti-
competitive practices, to produce a version of Windows
without the Windows Media Player to be sold alongside its
standard editions.
In 2008, the European Commission levied an additional
fine of $1.44 billion, claiming that Microsoft had not
complied with the earlier decision. Even more recently, in
response to a concern relating to the bundling of browsers,
Microsoft agreed to offer customers a choice of browsers
when first booting up their new operating system.
As of 2011, the European case against Microsoft remains
on appeal. There is strong evidence that the European-
imposed remedies have had little impact on the market for
media players or browsers. However, Microsoft is facing an
even stronger threat than U.S. or E.U. enforcement, such
as competition from the powerful Google search engine
and social media sites such as Facebook.
71. Pricing and output decisions
in monopoly markets
A monopoly market consists of one firm
(the firm is the market)
• firm has the power to set any price it wants
• however, the firm’s ability to set price is
limited by the demand curve for its product,
and in particular, the price elasticity of
demand
72. Pricing and output decisions in
monopoly markets
Assume demand
is linear: it is
downward sloping
because the firm is
a price setter
Assume MC is
constant
choose output
where MR=MC,
set price at P*
73. Pricing and output decisions in
monopoly markets
Demand is the
same as before, as
is MR
MC is upward
sloping, which
shows diminishing
returns
set output where
MR=MC
74. Implications of monopoly
for decision making
Monopoly market
most important lesson is not to be
arrogant and assume their ability to
earn economic profit can never be
diminished
changes in economics of a business
eventually break down a dominating
company’s monopolistic power
75. Capturing Consumer Surplus
CAPTURING CONSUMER SURPLUS
Price discrimination
Practice of charging different prices to
different consumers for similar goods.
If a firm can charge only one price
for all its customers, that price will
be P* and the quantity produced will
be Q*.
Ideally, the firm would like to charge
a higher price to consumers willing
to pay more than P*, thereby
capturing some of the consumer
surplus under region A of the
demand curve.
The firm would also like to sell to
consumers willing to pay prices
lower than P*, but only if doing so
does not entail lowering the price to
other consumers.
In that way, the firm could also
capture some of the surplus under
region B of the demand curve.
76. First degree price discrimination
Practice of charging each customer her reservation price.
First-Degree Price Discrimination
Variable profit
Sum of profits on each incremental unit produced by a
firm; i.e., profit ignoring fixed costs.
Reservation price
Maximum price that a customer is willing to pay for a
good.
Price Discrimination
77. ADDITIONAL PROFIT FROM PERFECT FIRST-
DEGREE PRICE DISCRIMINATION
Because the firm charges
each consumer her
reservation price, it is
profitable to expand output
to Q**.
When only a single price,
P*, is charged, the firm’s
variable profit is the area
between the marginal
revenue and marginal cost
curves.
With perfect price
discrimination, this profit
expands to the area
between the demand curve
and the marginal cost
curve.
78. FIRST-DEGREE PRICE
DISCRIMINATION IN PRACTICE
PERFECT PRICE DISCRIMINATION
The additional profit from producing and selling
an incremental unit is the difference between
demand and marginal cost.
IMPERFECT PRICE DISCRIMINATION
Firms usually don’t know the
reservation price of every consumer,
but sometimes reservation prices can
be roughly identified.
Here, six different prices are charged.
The firm earns higher profits, but some
consumers may also benefit.
With a single price P4, there are fewer
consumers.
The consumers who now pay P5 or P6
enjoy a surplus.
79. SECOND-DEGREE PRICE
DISCRIMINATION
Second-Degree Price Discrimination
Practice of charging different prices per unit for different
quantities of the same good or service.
Block pricing : Practice of charging different prices for
different quantities or “blocks” of a good.
Different prices are charged for
different quantities, or “blocks,” of
the same good. Here, there are
three blocks, with corresponding
prices P1, P2, and P3.
There are also economies of scale,
and average and marginal costs
are declining. Second-degree
price discrimination can then make
consumers better off by expanding
output and lowering cost.
80. Third-Degree Price Discrimination
Practice of dividing consumers into two or more
groups with separate demand curves and charging
different prices to each group.
CREATING CONSUMER GROUPS
If third-degree price discrimination is feasible, how
should the firm decide what price to charge each group
of consumers?
1. We know that however much is produced, total
output should be divided between the groups of
customers so that marginal revenues for each
group are equal.
2. We know that total output must be such that the
marginal revenue for each group of consumers is
equal to the marginal cost of production.
81. DETERMINING RELATIVE PRICES
Let P1 be the price charged to the first group of consumers,
P2 the price charged to the second group, and C(QT) the
total cost of producing output QT = Q1 + Q2. Total profit is
then
82. THIRD-DEGREE PRICE DISCRIMINATION
Consumers are divided into two
groups, with separate demand
curves for each group. The
optimal prices and quantities
are such that the marginal
revenue from each group is the
same and equal to marginal
cost.
Here group 1, with demand
curve D1, is charged P1,
and group 2, with the more
elastic demand curve D2, is
charged the lower price P2.
Marginal cost depends on the
total quantity produced QT.
Note that Q1 and Q2 are chosen
so that MR1 = MR2 = MC.
83. NO SALES TO SMALLER MARKETS
Even if third-degree price
discrimination is feasible,
it may not pay to sell to
both groups of consumers
if marginal cost is rising.
Here the first group of
consumers, with demand
D1, are not willing to pay
much for the product.
It is unprofitable to sell to
them because the price
would have to be too low
to compensate for the
resulting increase in
marginal cost.
84. THE ECONOMICS OF COUPONS AND
REBATES
Coupons provide a means of price discrimination.
TABLE 1 PRICE ELASTICITIES OF DEMAND FOR
USERS VERSUS NONUSERS OF COUPONS
PRICE ELASTICITY
PRODUCT NONUSERS USERS
Toilet tissue – 0.60 –0.66
Stuffing/dressing –0.71 –0.96
Shampoo –0.84 –1.04
Cooking/salad oil –1.22 –1.32
Dry mix dinners –0.88 –1.09
Cake mix –0.21 –0.43
Cat food –0.49 –1.13
Frozen entrees –0.60 –0.95
Gelatin –0.97 –1.25
Spaghetti sauce –1.65 –1.81
Crème
rinse/conditioner
–0.82 –1.12
Soups –1.05 –1.22
Hot dogs –0.59 –0.77
85. AIRLINE FARES
TABLE 2 ELASTICITIES OF DEMAND FOR AIR TRAVEL
FARE CATEGORY
ELASTICITY
FIRST
CLASS
UNRESTRICTED
COACH DISCOUNTED
Price –0.3 –0.4 –0.9
Income 1.2 1.2 1.8
Travelers are often amazed at the variety of fares available for round-
trip flights from New York to Los Angeles.
Recently, for example, the first-class fare was above $2000; the regular
(unrestricted) economy fare was about $1000, and special discount
fares (often requiring the purchase of a ticket two weeks in advance
and/or a Saturday night stayover) could be bought for as little as $200.
These fares provide a profitable form of price discrimination.
The gains from discriminating are large because different types of
customers, with very different elasticities of demand, purchase these
different types of tickets.
Airline price discrimination has become increasingly sophisticated. A
wide variety of fares is available.
86. Intertemporal Price Discrimination
and Peak-Load Pricing
INTERTEMPORAL PRICE
DISCRIMINATION
Intertemporal price
discrimination
Spending money in socially
unproductive efforts to acquire,
maintain, or exercise monopoly.
Peak-load pricing
Spending money in socially
unproductive efforts to
acquire, maintain, or
exercise monopoly.
Consumers are divided into
groups by changing the price
over time.
Initially, the price is high. The
firm captures surplus from
consumers who have a high
demand for the good and who
are unwilling to wait to buy it.
Later the price is reduced to
appeal to the mass market.
87. PEAK-LOAD
PRICING
Peak-Load Pricing
Demands for some goods
and services increase
sharply during particular
times of the day or year.
Charging a higher price P1
during the peak periods is
more profitable for the firm
than charging a single price
at all times.
It is also more efficient
because marginal cost is
higher during peak periods.
88. HOW TO PRICE A BEST-SELLING NOVEL
Publishing both hardbound and paperback editions of a
book allows publishers to price discriminate.
Some consumers want to buy a new bestseller as soon as
it is released, even if the price is $25. Other consumers,
however, will wait a year until the book is available in
paperback for $10.
The key is to divide consumers into two groups, so that
those who are willing to pay a high price do so and only
those unwilling to pay a high price wait and buy the
paperback.
It is clear, however, that those consumers willing to wait for
the paperback edition have demands that are far more
elastic than those of bibliophiles.
It is not surprising, then, that paperback editions
sell for so much less than hardbacks.
89. The Two-Part Tariff
TWO-PART TARIFF WITH
A SINGLE CONSUMER
Form of pricing in which consumers are charged both
an entry and a usage fee.
SINGLE CONSUMER
The consumer has
demand curve D.
The firm maximizes profit
by setting usage fee P
equal to marginal cost
and entry fee T* equal to
the entire surplus of the
consumer.
90. TWO-PART TARIFF WITH
TWO CONSUMERS
TWO CONSUMERS
The profit-maximizing
usage fee P* will exceed
marginal cost.
The entry fee T* is equal
to the surplus of the
consumer with the
smaller demand.
The resulting profit is
2T* + (P* − MC)(Q1 + Q2).
Note that this profit is
larger than twice the
area of triangle ABC.
91. TWO-PART TARIFF WITH MANY
DIFFERENT CONSUMERS
MANY CONSUMERS
Total profit π is the sum of the profit
from the entry fee πa and the profit
from sales πs. Both πa and πs depend on
T, the entry fee.
Therefore
π = πa + πs = n(T)T + (P − MC)Q(n)
where n is the number of entrants,
which depends on the entry fee T, and
Q is the rate of sales, which is greater
the larger is n.
Here T* is the profit-maximizing entry
fee, given P. To calculate optimum
values for P and T, we can start with a
number for P, find the optimum T, and
then estimate the resulting profit. P is
then changed and the corresponding T
recalculated, along with the new profit
level.
92. PRICING CELLULAR PHONE SERVICE
Most telephone service is priced using a two-part tariff: a
monthly access fee, which may include some free minutes,
plus a per-minute charge for additional minutes. This is also
true for cellular phone service, which has grown explosively,
both in the United States and around the world. In the case
of cellular service, providers have taken the two-part tariff
and turned it into an art form. In most parts of the United
States, consumers can choose among four national network
providers—Verizon, T-Mobile, AT&T, and Sprint. These
providers compete among themselves for customers, but
each has some market power. Market power arises in part
from oligopolistic pricing and output Decisions, but also
because consumers face switching costs: Most service
providers impose a penalty upwards of $200 for early
termination. Because providers have market power, they
must think carefully about profit-maximizing pricing
strategies. The two-part tariff provides an ideal means by
which cellular providers can capture consumer surplus and
turn it into profit. The two-part tariff works best when
consumers have identical or very similar demands.
93. PRICING CELLULAR PHONE SERVICE
TABLE 3 CELLULAR RATE PLANS (2011)
ANYTIME
MINUNTE
S
MONTHLY
ACCESS
CHARGES
NIGHT &
WEEKEND
MINUTES
PER-MINUTE
RATE AFTER
ALLOWANCE
A. VERIZON: AMERICA’S CHOICE BASIC
450 $39.99 Unlimited $0.45
900 $59.99 Unlimited $0.40
Unlimited $69.99 Unlimited Included
B. SPRINT: BASIC TALK PLANS
200 $29.99 Unlimited $0.45
450 $39.99 Unlimited $0.45
900 $59.99 Unlimited $0.40
C. AT&T INDIVIDUAL PLANS
450 $39.99 5000 $0.45
900 $59.99 Unlimited $0.40
Unlimited $69.99 Unlimited Included
94. PRICING CELLULAR PHONE SERVICE
TABLE 3 CELLULAR RATE PLANS (2011) (continued)
ANYTIME
MINUNTES
MONTHLY ACCESS
CHARGES
NIGHT & WEEKEND
MINUTES
PER-MINUTE RATE
AFTER ALLOWANCE
D. ORANGE (UK)
100 £10.00 None 2.5 pence
200 £15.00 None 2.5 pence
300 £20.00 None 2.5 pence
E. ORANGE (ISRAEL)
None 28.00 NIS None 0.59 NIS
100 38.00 NIS None 0.59 NIS
400 61.90 NIS None 0.59 NIS
F. CHINA MOBILE
150 58 RMB None 0.40 RMB
450 158 RMB None 0.35 RMB
800 258 RMB None 0.32 RMB
1200 358 RMB None 0.30 RMB
1800 458 RMB None 0.25 RMB
To convert the international prices to U.S. dollars (as of August 2011),
use the following conversion factors: 1£ = $1.60, 1 NIS = $0.30, and 1
RMB = $0.13.
96. Core Reading
• Keat, Paul G. and Young, Philip KY (2009)
Managerial Economics, 6th edition, Pearson
• Samuelson, William F. and Marks, Stephen
G.(2010) Managerial Economics, 6th edition, John
Wiley
• Pindyck, Robert S. and Rubinfeld, Daniel L.(2013)
Microeconomics, 8th edition, Pearson
• Samuelson, P.A. and Nordhaus, W. D.
(2010)“Economics” Irwin/McGraw-Hill, 19th
Edition
• Porter, Michael E. (2004)“Competitive Strategy –
Techniques for Analyzing Industries and Competitors”
Free Press