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Monopoly
Monopoly • Single seller that produces a product with no close substitutes. • Sources of Monopoly ◦Control of an essential input to a product ◦Patents or copyrights ◦Economies of scale: Natural monopoly ◦Government franchise: Post office Monopoly: Short-Run Equilibrium • Demand curve for the firm is the market demand curve. • Firm produces a quantity (Q*) where marginal revenue (MR) is equal to marginal cost (MR) • MR=MC • Exception: Q* = 0 if average variable cost (AVC) is above the demand curve at all levels of output Monopoly: Short Run Analysis Monopoly: Long Run Analysis Social Costs of Monopoly A discriminating monopolist • Price discrimination: The practice of charging different prices from different consumer(s). • Degrees of Price Discrimination o First Degree: o Second Degree: o Third Degree First Degree Price discrimination • The monopolist charges each consumer its reservation price, thereby extracting the entire consumer surplus. • Also called personalized pricing or perfect price discrimination. • Requires perfect knowledge on the part of the monopolist. • Difficult and rare. Second Degree Price Discrimination • The monopolist charges different price depending on the amount of sales it can make. • Also called product versioning or menu pricing. • Examples: o Quantity discounts such as special offers to customers who buy in bulk over those who buy a single product o Buy-two-get-one offers o Coupons o Loyalty and rewards cards for frequent customers Third Degree Price Discrimination • The monopolist charges different prices based on the unique demographics of subsets of its consumer base. • Easier to execute as it just requires broad characteristics of the subsets of consumers. • Exploits the information of different elasticities of demand for different subset if consumers. • Example: movie theater ticket sales, admission prices to amusement parks Conditions required for Price discrimination • Market segmentation • Imperfect competition • Different elasticities of demand
