Professional Documents
Culture Documents
and Pricing
By:
3
Market
• Market
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Market Structure
5
Characteristics of different markets
Perfect Monopolistic
Characteristic Competition Competition Oligopoly Monopoly
Number of firms A very large Many Few One
number
Control over price None Some, but within Limited by mutual Considerable
rather narrow limits inter-dependence;
considerable with
collusion
Examples Agriculture Retail trade, dresses, Steel, auto, farm Local utilities
shoes implements 6
Perfect Competition
• Very large numbers of sellers
• Standardized product
• Price takers
• Easy entry and exit
• Perfectly elastic demand
– Firm produces as much or little as they want at the
price
– Demand graphs as horizontal
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Short-run equilibrium in perfect
competition
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Graphical Analysis of Equilibrium
• The equilibrium for a firm and industry in perfect
competition. The equilibrium market price, P1 is
determined by the demand and supply functions in the
industry as a whole. The firms in the industry, as price-
takers, then have to determine what output they will
supply at the price.
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Short-run equilibrium
• P<AVC then the firm should shut down in the short-run
since it cannot even cover its variables costs, let alone
make any contribution to fixed costs.
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Long-run equilibrium
• It is possible in the long-run for firms to enter or leave
the industry;
where P=LMC.
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Monopoly
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Monopoly
• Single seller – a sole producer
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Examples of Monopoly
• Public utility companies
Natural Gas
Electric
Water
• Near monopolies
Intel
Wham-O
• Professional Sports Teams
Barriers to Entry
Economies of Scale
Legal Barriers: Patents and Licenses
Ownership of Essential Resources
Pricing
Economies of Scale
$20
Average total cost
15
ATC
10
0 50 100 200
Quantity
Monopoly Demand
$142
132
122
112 Loss = $30 D
102
Gain = $132
92
82
0 1 2 3 4 5 6
Monopoly Demand
• All customers must pay the same price
$142
132
122
112 Loss = $30 D
102
Gain = $132
92
82
MR
0 1 2 3 4 5 6
Monopoly Demand
150
Price
100
50
D
MR
0 2 4 6 8 10 12 14 16 18
Total-Revenue Curve
$750
Total Revenue
500
250
TR
0 2 4 6 8 10 12 14 16 18
Output and Price Determination
Steps for Graphically Determining the Profit-Maximizing Output, Profit-
Maximizing Price, and Economic Profits (if Any) in Pure Monopoly
Step 1 Determine the profit-maximizing output by finding where MR=MC.
Determine the profit-maximizing price by extending a vertical line
Step 2 upward from the output determined in step 1 to the pure monopolist’s
demand curve.
Method 2. Find total cost by multiplying the average total cost of the
profit-maximizing output by that output. Find total revenue by
multiplying the profit-maximizing output by the profit-maximizing
price. Then subtract total cost from total revenue to determine the
economic profit (if any).
Output and Price Determination
$200
Price, Costs, and Revenue
175
Pm=$122 MC
150
125
Economic
Profit ATC
100
75 D
A=$94
MR=MC
50
25
MR
0
1 2 3 4 5 6 7 8 9 10
Quantity
Misconceptions of Monopoly Pricing
MC
ATC
A Loss
Pm
AVC
V
D
MR=MC
MR
0 Qm
Quantity
Economic Effects of Monopoly
Pure competition is efficient
Monopoly is inefficient
S=MC MC
Pm b
P=MC= d
Pc Pc c
Minimum
ATC a
D D
MR
Qc Qm Qc
(a) (b)
Purely Competitive Market Pure Monopoly
Economic Effects of Monopoly
• Income transfer
• Cost complications
• Economies of scale
• X-Inefficiency
• Rent seeking expenditures
• Technological advance
X-Inefficiency
ATCx X
Average total costs
ATC1
X'
ATCx' Average
ATC2 total cost
0 Q1 Q2
Quantity
Assessment and Policy Options
• Antitrust laws
• Break up the firm
• Regulate it
• Government determines price and
quantity
• Ignore it
• Let time and markets get rid of
monopoly
Global Perspective
Competition from Foreign Multinational Corporations
Price Discrimination
• Price discrimination
• Charging different buyers different
prices
• Price differences are not based on
cost differences
• Conditions for success:
• Monopoly power
• Market segregation
• No resale
Examples of Price Discrimination
• Business travel
• Electric utilities
• Movie theaters
• Golf courses
• Railroad companies
• Coupons
• International trade
Graphical Analysis
P P
Economic
profit Economic
Pb
profit
Ps
MC = ATC MC = ATC
Ds
Qb Qs
MRb Db MRs
Monopoly
Price
Price and Costs (Dollars)
Pm Fair-Return
Price
Socially
a f Optimal
Pf Price
ATC
Pr r MC
MR D
b
0
Qm Qf Qr
Quantity
De Beers’s Diamonds
• De Beers once controlled about 80%
of the world’s diamond market
• Monopoly position eroded over time
• New diamond discoveries
• Nearly perfect artificial diamonds
• Unfavorable media attention
• Now focus on increasing demand for
diamonds rather than controlling
supply