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Chapter 10 Monopoly and other forms of imperfect competition

Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings Slides prepared by Nahid Khan

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Imperfect competition
• Perfect competition
– – – – Firms have no control over price. Firms produce homogenous products. Price equal the marginal cost of production. Long-run economic profits are not possible due to free entry and exit. – An ideal market that maximises economic surplus. – A situation that does not always exist.

Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings Slides prepared by Nahid Khan

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Imperfect competition
• Imperfectly competitive firms
– – – – – – – Have some control over price. Price may be greater than the cost of production. Long-run economic profits are possible. Face a downward-sloping demand curve. Contribute to loss of efficiency. Are very common in every economy. Reduce economic surplus to varying degrees by restricting output.

Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings Slides prepared by Nahid Khan

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Imperfect competition • Different forms of imperfect competition – Pure monopoly – Oligopoly – Monopolistic competition Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-4 .

examples • City power provider • Only petrol station in a small town • AFL football league Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.Imperfect competition • Various forms of imperfect competition – Pure monopoly (most inefficient)  The only supplier of a unique product with no close substitutes. Bernanke and Jennings Slides prepared by Nahid Khan 10-5 .

Mobil • Airlines Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Shell.Imperfect competition • Various forms of imperfect competition – Oligopoly (more efficient than a monopoly)  A firm that produces a product for which only a few rival firms produce close substitutes. examples • Major banks in Australia • BP. Bernanke and Jennings Slides prepared by Nahid Khan 10-6 .

Bernanke and Jennings Slides prepared by Nahid Khan 10-7 . CDs Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. examples • Restaurants in Lygon Street • Novels. films.Imperfect competition • Different forms of imperfect competition – Monopolistic competition (closest to perfect competition)  A large number of firms that produce slightly differentiated products that are reasonably close substitutes for one another.

– The imperfectly competitive firm faces a downwardsloping demand curve. Bernanke and Jennings Slides prepared by Nahid Khan 10-8 . Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.Imperfect competition • The essential difference between perfectly and imperfectly competitive firms comes from possible substitutability of products – The perfectly competitive firm faces a perfectly elastic demand for its product.

Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. The firm has no market power. – At the equilibrium price. Bernanke and Jennings Slides prepared by Nahid Khan 10-9 . the firm sells all it wishes.Imperfect competition • In perfect competition – Supply and demand determine equilibrium price.

Imperfect competition • With perfect competition – If the firm raises its price. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. – If the firm lowers its price. Bernanke and Jennings Slides prepared by Nahid Khan 10-10 . – The firm’s demand curve is the horizontal line at the market price. sales will be zero. sales will not increase.

the firm’s demand curve is the market demand curve.Imperfect competition • With imperfect competition – The firm has some control over price or some market power. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. – The firm faces a downward-sloping demand curve. – In the case of a monopoly. Bernanke and Jennings Slides prepared by Nahid Khan 10-11 .

The demand curves facing perfectly and imperfectly competitive firms Perfectly competitive firm $/unit of output Imperfectly competitive firm Market price D Price D Quantity Quantity Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-12 .

Five sources of market power • Exclusive control over inputs  A singer with gifted talent • Government-created monopolies  A new pharmaceutical drug  Taxi licenses • Economies of scale (natural monopolies)  City water supply • Network economies  Microsoft Windows Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-13 .

Economies of scale and the importance of fixed costs • Firms with large fixed costs and low variable costs – Have low marginal costs – Average total cost declines sharply as output increases – Have higher proportion of fixed cost than variable cost in average total cost – Economies of scale will exist Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-14 .

Total and average total costs for a production process with economies of scale TC = F + MQ Average cost ($/unit) Total cost ($/year) F + Q0 F ATC = F/Q + M M Q0 Quantity Quantity Total cost rises at a constant rate as output rises Average costs decline and is always higher than marginal cost 10-15 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan .

000 000 $200 000 $800 000 $1.Costs for two computer game producers (1) Nintendo PlayStation Annual production Fixed cost Variable cost Total cost Average total cost per game 1.160 000 $0.200 000 $200 000 $960 000 $1. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-16 .97 Observations • Fixed costs are a relatively small share of total cost.000 000 $1.00 1. • Cost/game is nearly the same.

• PlayStation has a $1. Bernanke and Jennings Slides prepared by Nahid Khan 10-17 .Costs for two computer game producers (2) Nintendo PlayStation Annual production Fixed cost Variable cost 1. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. • PlayStation can lower prices.000 000 $200 000 1.200 000 $10.67 average cost advantage.53 Observations • Fixed costs are a relatively large share of total cost.240 000 $8.000 000 $10. cover cost and attract customers.000 000 $240 000 Total cost Average total cost per game $10.200 000 $10.20 $10.

000 000 $340 000 Total cost Average total cost per game • • • • $10.340 000 $6. Nintendo’s average cost increases to $20.08.000 units to PlayStation.Costs for two computer game producers (3) Nintendo PlayStation Annual production Fixed cost Variable cost 500 000 $10.700 000 $10.000 000 $100 000 1. A large number of firms cannot survive when the cost differential is high.20/unit.100 000 $20.08 Shift of 500. PlayStation average cost falls to $6.20 $10. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-18 .

Bernanke and Jennings Slides prepared by Nahid Khan 10-19 . Cost of producing a computer Fixed cost Software Variable cost Hardware 1984 1990 20% 80% 80% 20% Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.Economies of scale and the importance of fixed costs • Fixed investment in research and development has been increasing as a share of production costs.

Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.Economies of scale and the importance of fixed costs (cont.) • Thinking as an economist – Why does Intel sell the overwhelming majority of microprocessors used in personal computers? • As fixed costs become more important. Bernanke and Jennings Slides prepared by Nahid Khan 10-20 . the perfectly competitive pattern becomes less common.

They want – to maximise profits – to select the output level that maximises the difference between TR and TC. where MR = MC.Profit maximisation for the monopolist • A price taker (perfect competition) and a price setter (imperfect competition) share two economic goals. Bernanke and Jennings Slides prepared by Nahid Khan 10-21 . Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.

Profit maximisation for the monopolist • Marginal revenue for the monopolist – Firms in perfect competition and monopoly firms (assuming a single price firm)  Both increase output when MR > MC. Bernanke and Jennings Slides prepared by Nahid Khan 10-22 .  Calculate MC the same way.  Do not have the same MR at a given price. • In perfect competition: MR = P • In monopoly: MR < P Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.

MR = $3 < P = $5 Price ($/unit) 6 5 D 2 3 Quantity (units/week) 8 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-23 . then TR = $5 x 3 = $15 The MR of selling the 3rd unit = $3 (15-12) For the 3rd unit. then TR = $6 x 2 = $12 If P = $5.The monopolist’s benefit from selling an additional unit 8 • • • • If P = $6.

– MR < P because price must be lowered to sell an additional unit. – MR is the change between two quantities.Marginal revenue in graphical form • Observations – MR declines as quantity increases. P 6 5 Q 2 3 TR 12 15 MR 3 1 -1 4 3 4 5 16 15 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-24 .

Marginal revenue in graphical form Price & marginal revenue ($/unit) 8 P 6 5 4 3 Q 2 3 4 5 TR 12 15 16 15 MR 3 1 -1 3 1 -1 2 3 4 5 D 8 MR Quantity (units/week) Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-25 .

Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. is the same for MR and D. • The horizontal intercept for MR.The marginal revenue curve for a monopolist with a straight-line demand curve a Price a/2 MR D Q0/2 Quantity Q0 Observations • The vertical intercept. Bernanke and Jennings Slides prepared by Nahid Khan 10-26 . Q0. a. Q0/2.. is one half the demand intercept.

Profit maximisation for the monopolist • Profit maximising decision rule: – When MR > MC. – Profits are maximised at the level of output for which MR = MC. – When MR < MC. Bernanke and Jennings Slides prepared by Nahid Khan 10-27 . – Set the price that consumers are willing to pay at that level of output. output should be reduced. output should be increased. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.

Bernanke and Jennings Slides prepared by Nahid Khan D 24 10-28 . 4 3 2 MR 8 12 Quantity (units/week) Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.The monopolist’s profit-maximising output level 6 Price ($/unit of output) Marginal cost Observations • If P = $3 & Q = 12 MR < MC and output should be reduced. • Profits are maximised at 8 units where MR = MC. • The maximum single price at which 8 units can be sold is P=$4.

10 0.10 ATC 0. Bernanke and Jennings Slides prepared by Nahid Khan 10-29 .05 MC D 20 MC D 20 MR MR 24 Minutes (millions/day) Minutes (millions/day) Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.08 ATC 0.12 Price ($/minute) Price ($/minute) 0.Even a monopolist may suffer an economic loss Being a monopolist doesn’t guarantee an economic profit Economic loss = $400 000/day Economic profit = $400 000/day 0.05 0.

The demand and marginal cost curves for a monopolist Why the invisible hand breaks down under monopoly 6 Price ($/unit of output) Marginal cost 3 The socially optimal amount occurs where MC = D(MR) at 12 units D 12 Quantity (units/week) Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 24 10-30 .

• Between 8 and 12. where MR = MC. Bernanke and Jennings Slides prepared by Nahid Khan D 24 10-31 . MB to society > MC to society. • Single-price monopolist will not increase output because MR<MC. is less than the socially optimal output of 12.The demand and marginal cost curves for a monopolist (cont. 4 3 2 MR 8 12 Quantity (units/week) Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.) Why the invisible hand breaks down under monopoly 6 Price ($/unit of output) Marginal cost • The profit maximising level of output of 8 units.

Bernanke and Jennings Slides prepared by Nahid Khan D 24 10-32 . 4 3 2 MR 8 12 Quantity (units/week) Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.The demand and marginal cost curves for a monopolist (cont. the monopoly produces less than the socially optimal amount • The deadweight loss of the monopoly to society = (1/2)($2/unit)(4units/wk) = $4/wk.) Why the invisible hand breaks down under monopoly 6 Price ($/unit of output) Deadweight loss Marginal cost • Because MR < P.

Why the invisible hand breaks down under monopoly • Monopoly – Profits are maximised where MR = MC – P > MR – P > MC – Deadweight loss • Perfect competition – Profits are maximised where MR = MC – P = MR – P = MC – No deadweight loss Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-33 .

) • Difficulties in reducing the deadweight loss of monopolies – Enforcing competition and anti-monopoly laws – Patents. Bernanke and Jennings Slides prepared by Nahid Khan 10-34 . copyrights and innovation – Natural monopolies Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.Why the invisible hand breaks down under monopoly (cont.

Bernanke and Jennings Slides prepared by Nahid Khan 10-35 . • Examples of price discrimination – Senior citizens and student discounts on movie tickets – Supersaver discounts on air travel – Rebate coupons Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.Using discounts to expand the market • Price discrimination – The practice of charging different buyers different prices for essentially the same good or service. where differences do not simply reflect differences in costs of supplying different buyers.

) • Thinking as an economist – Why do many movie theatres offer discount tickets to students? – Why do most airlines have peak and off-peak rates? – Why do fitness clubs have a membership fee and per unit price? Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.Using discounts to expand the market (cont. Bernanke and Jennings Slides prepared by Nahid Khan 10-36 .

) • Example – Rosie can edit term papers for eight students each with a different reservation price. If Rosie’s opportunity cost of her time to edit each paper is $29 and she must charge a single price to each student. how many term papers should Rosie edit? How much economic profit would she make? Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-37 .Using discounts to expand the market (cont.

Total and marginal revenue from editing Student Reservation price ($ per paper) Total revenue ($ per week) Marginal revenue ($ per paper) A B C D E F G H 40 38 36 34 32 30 28 26 40 76 108 136 160 180 196 208 40 36 32 28 24 20 16 12 10-38 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan .

4 x $34 = $136/wk  MR is the difference in TR from adding another student  If MR > MC: increase output Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. or for 4 papers. Bernanke and Jennings Slides prepared by Nahid Khan 10-39 .Using discounts to expand the market • Example – How many manuscripts should Rosie edit when she must charge all buyers the same amount?  Opportunity cost = $29  TR = P x Q.

Why the invisible hand breaks down under monopoly • Example – How many manuscripts should Rosie edit?  Rosie edits 3 papers • • • • TC = 3 x $29 = $87 TR = $108 Economic profit = $108 .$87 = $21/wk Accounting profit = $108 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-40 .

Why the invisible hand breaks down under monopoly • Example – How many manuscripts should Rosie edit?  Opportunity cost = $29  Must charge the same price  Reservation price > opportunity cost for student A to F  Socially efficient number is 6 • • • • TR = 6 x $30 = $180 TC = 6 x $29 = $174 Economic profit = $180.$174 = $6 Accounting profit = $180 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-41 .

Why the invisible hand breaks down under monopoly • Example – If Rosie can price discriminate. how many papers should she edit?  Assume Rosie can charge each student their reservation price. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-42 .

Example Student Reservation price A B C D E F G H 40 38 36 34 32 30 28 26 10-43 • • • • Rosie would edit A to F TR = $40 + $38… = $210 TC = 6 x $29 = $174 Economic Profit = $210 $174 = $36/wk • Economic profit is $30 more than when she had to charge a single price. Bernanke and Jennings Slides prepared by Nahid Khan . Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.

Using discounts to expand the market • Perfectly discriminating monopolist – Charging each buyer exactly their reservation price     Economic surplus is maximised Consumer surplus is zero Economic surplus = producer surplus No deadweight loss Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-44 .

– Low price buyers could resell to other buyers at a higher price. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.Using discounts to expand the market (cont.) • Limitations to perfect price discrimination – Seller will not know each buyer’s reservation price. Bernanke and Jennings Slides prepared by Nahid Khan 10-45 .

– Therefore the firm should keep expanding output in each submarket as long as MR in that submarket exceeds MC. – Group pricing essentially allows a firm to divide its market into two submarkets in which it can charge two different prices.) • Group pricing – A form of price discrimination where different discounts are offered in different submarkets. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-46 . – In each market the firm can charge the same price to every buyer like an ordinary monopolist. while members of particular submarket all receive the same discount.Using discounts to expand the market (cont.

while those whose reservation prices are below $34 are commerce students. How much should Rosie charge for editing if she uses group pricing? Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.) • Group pricing – Question: Suppose Rosie knows that students whose reservation prices are at least $34 are science students. Bernanke and Jennings Slides prepared by Nahid Khan 10-47 .Using discounts to expand the market (cont.

Using discounts to expand the market (cont.)
• The hurdle method of price discrimination
– The practice by which a seller offers a discount to all buyers who overcome some obstacle. – Examples:
 Rebate coupon  Bundling of goods  Foregoing extras that come with a higher price

Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings Slides prepared by Nahid Khan

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Using discounts to expand the market (cont.)
• The hurdle method of price discrimination is used to solve two problems:
– Seller does not know the reservation prices. – Seller must separate high and low price buyers.

Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings Slides prepared by Nahid Khan

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Using discounts to expand the market (cont.)
• A perfect hurdle
– Completely segregates buyers whose reservation prices lie above it from others whose reservation prices lie below it, imposing no cost on those who jump the hurdle.

• What do you think?
– Is a perfect hurdle possible?

Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank, Bernanke and Jennings Slides prepared by Nahid Khan

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Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. – Students with at least a $36 reservation price never use the coupon. – Students with a reservation price below $36 use the coupon.Using discounts to expand the market (cont.) • Question – How much should Rosie charge for editing if she uses a perfect hurdle? • Assume – Rosie offers a mail in rebate coupon. – Discount coupon = $4. Bernanke and Jennings Slides prepared by Nahid Khan 10-51 . – Opportunity cost = $29.

Bernanke and Jennings Slides prepared by Nahid Khan .Price discrimination with a perfect hurdle Student Reservation price ($ per paper) Total revenue ($ per week) Marginal revenue ($ per paper) List price submarket A B C D E F G H 40 38 36 34 32 30 28 26 40 76 108 34 64 90 112 130 40 36 32 34 30 26 22 18 10-52 Discount price submarket Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.

) • Solution – TR = (3)(36) + (2)(32) = $172 – MC = ($5)($29) = $145 – Economic profit = $27/wk • Question – Is price discrimination a desirable thing?  The hurdle method raised economic surplus. Bernanke and Jennings Slides prepared by Nahid Khan 10-53 .Using discounts to expand the market (cont. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.

Bernanke and Jennings Slides prepared by Nahid Khan 10-54 .29) = $21/wk 2(32 .Using discounts to expand the market (cont.29) = $6/wk $27/wk Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.29) = $21/wk – Discount price = 3(36 .) Calculating economic surplus Consumer surplus Both Single price & discount Reservation price Actual price Consumer surplus A B C $40 $38 $36 $36 $36 $36 $4 $2 $0 $6 Without discount D With discount $34 $22 $2 $8 • Producer surplus – Single price = 3(36 .

Using discounts to expand the market (cont.) • Question – Is Rosie’s discount rebate socially efficient? Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-55 .

) • Examples of price discrimination – – – – – Temporary sales Book publishers and paperback books Automobile producers offer various models Commercial air carriers Movie producers Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-56 .Using discounts to expand the market (cont.

Bernanke and Jennings Slides prepared by Nahid Khan 10-57 .Using discounts to expand the market (cont.) • Thinking as an economist – Why might an appliance retailer instruct its salespeople to hammer dents into the sides of its stoves and refrigerators? Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.

– Hurdles are not perfect. Bernanke and Jennings Slides prepared by Nahid Khan 10-58 . – The hurdle method of price discrimination reduces the inefficiency. therefore. there will be some efficiency loss. – The more finely the seller can discriminate. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.) • Summary – Single price monopolies are inefficient because P > MR.Using discounts to expand the market (cont. the smaller the efficiency loss.

– Promote efficiency and innovation. – Wider community can provide strong incentives for suppliers. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-59 .Public policy towards competition • National competition policy – Competitive markets will generally serve the interests of consumers.

Bernanke and Jennings Slides prepared by Nahid Khan 10-60 .) • The Trade Practices Act and the ACCC – Promotion of competition and fair trading – Provision of consumer protection • Thinking as an economist – How does the ACCC use cost-benefit thinking in applying the Act’s authorisation and notification processes? Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.Public policy towards competition (cont.

) • Regulating natural monopolies – State ownership. marginal cost pricing versus the cost of less incentive for innovation – Exclusive contracting for natural monopoly  Competition for the contract sets P = MC  Difficulty when fixed costs are high such as electric utilities Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-61 .Public policy towards competition (cont.

Public policy toward natural monopoly • Regulating natural monopolies in Australia • Abandoned direct regulation • Incentive compatible regulatory regimes such as price caps Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank. Bernanke and Jennings Slides prepared by Nahid Khan 10-62 .

Bernanke and Jennings Slides prepared by Nahid Khan 10-63 .) • What do you think? – Should we regulate natural monopolies? Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Principles of Microeconomics by Frank.Public policy toward natural monopoly (cont.