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ECON 160

ECON 160. Week 13 Monopoly: Price Searcher Chapter 15. Demand Facing the Firm. $Price. Demand. $10 9 8 7 6 5 4 3 2 1. D. Qty/T. 1 2 3 4 5 6 7 8. Total Revenue. $Price. Demand. $10 9 8 7 6 5

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ECON 160

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  1. ECON 160 Week 13 Monopoly: Price Searcher Chapter 15

  2. Demand Facing the Firm $Price Demand $10 9 8 7 6 5 4 3 2 1 D Qty/T 1 2 3 4 5 6 7 8

  3. Total Revenue $Price Demand $10 9 8 7 6 5 4 3 2 1 D Qty/T 1 2 3 4 5 6 7

  4. Marginal Revenue =Additional Revenue $Price Demand $10 9 8 7 6 5 4 3 2 1 D Qty/T 1 2 3 4 5 6 7

  5. Marginal Revenue $Price Demand D MR Qty/T

  6. Marginal Revenue & Elasticity of Demand $ P x $ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1 Ed > 1 Ed = 1 Ed < 1 Demand x 1 2 3 4 5 6 7 8 9 10 Qtyx /T Marginal Revenue

  7. Monopoly Output $Price Demand MC Pm Mc D MR Qm Qty/T

  8. Market Power: No Close Substitutes $Price MC Demand Pm Mc D MR Qty/T Qm

  9. Market Power: Few Close Substitutes $Price MC Demand Pm Mc D MR Qty/T Qm

  10. Market Power: Many Close Substitutes $Price MC Demand Pm D Mc MR Qty/T Qm

  11. Price Taker: No Market Power: Many Identical Substitutes $Price MC Demand P = MR P = Mc Qty/T Qm

  12. Monopoly Profit? Demand MC Pm Profit AC D MR Qm Qty/T

  13. Response to Profits • New firms enter with similar products • Demand declines and becomes more elastic • Price falls, output falls and profits decline

  14. Effect of Competition $P MC D AC Pm D MR Qm Qty/T

  15. Monopoly Efficiency Loss ? $Price Demand MC Pm Pc? D MR Qc? Qm Qty/T

  16. Sources of Monopoly • Natural Monopoly • Patents • Firm actions • Legal harassment • Exclusive licensing • Bundling

  17. Solutions • Government Price regulation • Enforcement of Anti-Trust Laws • Price Discrimination

  18. Price Discrimination • Charging different prices for different units sold. • Allows firms to increase sales and capture more of consumer surplus.

  19. Monopoly Pricing: Single Price $ Price Demand Pm Marginal Cost MR Qty/T Qm

  20. First Degree: Charging different customers different prices. (i.e. moving down the demand curve) • Auction

  21. Monopoly Pricing: First Degree $ Price P1 Demand P2 P3 P4 P5 Marginal Cost P6 Qty/T Q1 Q2 Q3 Q4 Q5 Q6

  22. First Degree: Charging different customers different prices. (i.e. moving down the demand curve) • Auction • College scholarships

  23. First Degree: Different Prices for different buyers $ Price Demand Scholarship Amount Tuition Marginal Cost MR Qty/T Qm

  24. First Degree: Charging different customers different prices. (i.e. moving down the demand curve) • Auction • College scholarships • IBM Punch Cards • Polaroid Camera & Film • Xerox copier & Toner • Ink Jet Printers & Cartridges • Razor handle & Blades • Swiffer handle & Pads • Glade Plugins & refills

  25. Second Degree: (Quantity Forcing) • Offering a schedule of prices to all buyers, which successively lowers the price for additional units, purchased (Moving down each buyers individual demand) • Tires: buy 3, get 4th free. • Family Gym membership • Product prices, (Drinks, coffee, cereal, toothpaste) • medium16 oz. $ 1.09, .07/oz. • large: 22 oz. $ 1.19, extra 6 oz. @ .02/oz. • extra large:32 oz. $1.29, extra 10 oz. @ .01/ oz.

  26. Third Degree: Charging different prices to different groups according to different elasticity of Demand.

  27. Third Degree: Identify Sub-groups Market A B P P P Pb Pm Pm Pm Da Pa MC MR D Db Qm Qa Q/t Qb Qm Q/t Qm Q/t

  28. Third Degree: Charging different prices to different groups according to different elasticity of Demand. • Grocery coupons • Theaters • Airlines & Hotels • Newly released unique products (Segway) • Prescription drugs in different countries. • Brand name mixers (Holiday Sale) • Mattresses: Match any advertised price • Menu (Freeway) • Menu (Chinese)

  29. Necessary Conditions for Successful Price Discrimination • Ability to identify and separate buyers by elasticity of demand. • Collect different prices from the different buyers • Prevent Resale

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