Monopoly, Cartels, and Price Discrimination

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Chapter 10

• Monopoly, Cartels, and Price Discrimination

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A Single-Price Monopolist

• A monopolist faces the (downward-sloping) market
  demand curve.
• If the monopolist charges the same price for all
  units sold, its total revenue (TR) is

TR p x Q
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Avenue and Marginal Revenue

• Average revenue (AR) is total revenue divided by
  quantity
• Marginal revenue (MR) is the revenue resulting
  from the sale of an additional unit of
  production
• The monopolist must reduce the price to increase
  sales therefore the MR curve is below the
  demand curve.

AR TR/Q (p x Q)/Q p
MR ?TR/?Q
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Short-Run Profit Maximization for a Monopolist
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Competition and Monopoly Compared

• Unlike a competitive firm, the monopolist does
  not have a supply curve because it chooses its
  price.
• The monopolist is the industry, so that its
  profit-maximizing conditions is the equilibrium
  of the industry.
• In a perfectly competitive industry price equals
  MC. But a monopolist produces at a lower level of
  output, with price exceeding MC.

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The Inefficiency of Monopoly
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Entry Barriers and Long-Run Equilibrium

• Despite incentives to enter, effective entry
  barriers allow monopoly profits to persist in the
  long run.
• Entry barriers are of two types
• - natural such as economies of scale
• - created by advertising campaigns or
• by government regulation

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A Cartel Members Incentive to Cheat
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Price Discrimination

• A producer practices price discrimination by
  charging different prices for the same products
  that have the same cost
• Central to this is that different consumers value
  the product at different amounts.
• Any firm facing a downward-sloping demand curve
  can increase profits if it is able to price
  discriminate.
• A firm captures consumer surplus by charging
  different prices for different units sold.
• Perfect price discrimination transfers all
  consumer surplus to the seller.

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Price Discrimination among Units of Output
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Price Discrimination among Market Segments
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The Consequences of Price Discrimination

• Price discrimination increases firms profits
  (otherwise they wouldnt do it!).
• For price discrimination by the unit, firms will
  often increase their output and overall
  efficiency will increase.
• The effect on consumers is unclear they may
  lose consumer surplus, but they could also gain
  surplus (if output increases as a result).