Write down course objectives 4 through 6 from text page
263.
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3. Outline
IV. Price
Discrimination
A. Price discrimination captures some consumer
surplus (the value consumers receive from a good minus what they pay for it) for the
monopolist. Price discrimination increases the firm’s total revenue. By price
discriminating, the monopoly is able to capture as extra revenue and hence extra profit
some of the consumer surplus.
B. Price discrimination can take the form of charging some customers a higher price
than others for the identical good or charging an individual customer more per item on a
small purchase than a large purchase even though the costs of selling to the different
customers or the different number of units are the same.
1. One method of price discrimination charges a single buyer different prices on each
unit of the good purchased. Initial units consumed, with potentially more consumer
surplus, are priced higher than later units, which have less consumer surplus.
2. Another method of price discrimination charges higher prices to consumers who more
highly value consumption of an additional unit of a good. Customers with a low elasticity
of demand are charged a higher price than customers with a high elasticity of demand.
3. Perfect price discrimination captures all of the consumer surplus. Perfect
price discrimination occurs when a firm charges a different price for each unit sold and
charges each customer the highest price he or she is willing to pay.
E. Price-discriminating monopolies produce more output, have higher total revenue, and
higher total profit than similar single-price monopolies. But the ability to price
discriminate depends on two conditions:
1. Price discrimination is possible only if the good cannot be resold by one customer
to another.
2. Successful price discrimination requires that the firm be able to distinguish
between groups of customers with different elasticities of demand.
V. Comparing Monopoly and Competition
A. Compared to an identical perfectly
competitive industry, a single-price monopoly produces less output and charges a higher
price.
B. In general, relative to a perfectly competitive industry, a monopoly charges a
higher price and produces less output, although the more perfectly the monopoly can
price discriminate the closer is its output to the competitive level.
1. A monopoly able to perfectly price discriminate produces the same output as a
perfectly competitive industry but charges a higher price for all except the last unit
sold.
C. Monopolies are inefficient because their output restriction/price elevation creates
a loss in consumer and producer surplus. This loss is the deadweightloss.
1. Producer surplus is analogous to consumer surplus; it is the difference
between the price the producer actually receives for the product less the minimum price
the producer would have accepted to supply the unit.
2. Deadweight loss measures inefficiency as the reduction in consumer and
producer surplus resulting from a restriction of output below its efficient level.
a) A perfectly price-discriminating monopoly creates no deadweight loss and is
efficient.
b) Single-price monopolies capture some of the consumer surplus. Monopolies that can
price discriminate obtain more of the consumer surplus and monopolies that can perfectly
price discriminate capture all the consumer surplus.
D. Monopolies can earn an economic profit indefinitely, so people have an incentive to
create a monopoly. Rent seeking is the activity of trying to establish a monopoly.
1. Rent seeking is costly. People are willing to spend on rent seeking an amount equal
to the economic profit that results from creating the monopoly.
2. Because rent seeking uses resources, the total cost imposed on society by a
monopoly equals the sum of the deadweight loss and the value of resources used in rent
seeking.
E. Monopolies may benefit society through economies of scale and scope and through an
incentive to innovate.
1. Monopolies frequently exist because of economies of scale (when the ATC
decreases as the firm expands output) or economies of scope (when the ATC decreases
as the number of different goods produced increases). In these cases, the MC may be
lower for a monopoly than for a competitive industry comprising many small firms. The
monopoly may produce more output and charge a lower price than would a perfectly
competitive industry.
2. Patents, which assign an inventor a temporary monopoly, may increase the pace of
innovation. The evidence is unclear about whether monopoly firms increase the rate of
patenting; however, the evidence does suggest that large firms more quickly adopt new
technological advances.
1. Review Helpful Hints in your study guide.
2. Complete even-numbered Questions in your study guide
and check your answers.
3. If you watched the video, write one or more sentence about each of its three
episodes which will bring the episodes and lessons learned from them to mind.
4. If not done in class, complete the Two-Minute-Feedback.
8.
Summary (text page 282)
Price Discrimination
1. Price discrimination is an attempt by the monopoly to
convert consumer surplus into economic profit.
2. Perfect price discrimination extracts all the consumer
surplus. Such a monopoly charges a different price for each unit sold and obtains
the maximum price that each consumer is willing to pay for each unit bought.
3. With perfect price discrimination,the monopoly produces
the same output as would a perfectly competitive industry.
4. A monopoly that discriminates between groups of
customers produces the output for each group at which marginal cost equals marginal
revenue and charges each group the most it is willing to pay.
Comparing Monopoly and Competition
5. A single-price monopoly charges a higher price and
produces a smaller quantity than does a perfectly competitive industry.
6. A perfect price-discriminating monopoly produces the
competitive quantity and sells the last unit for the competitive price.
7. A single-price monopoly restricts output and creates a
deadweight loss. A perfect price-discriminating monopolist is efficient but captures
all the surplus.
8. Monopoly imposes costs that equal its deadweight loss
plus the cost of the resources devoted to rent seeking.
9. Monopolies with large economies of scale and scope can
produce a larger quantity at a lower price than a competitive industry can achieve, and
monopoly might be more innovative than competition.
9.
Preview
Most firms lie between the extremes of
competition and monopoly. Brand name loyalty, some degree of control over price, and
product differentiation frequently characterize monopolistic competition. The kinked
demand curve and its resultant sticky prices and the absence of price wars characterize
oligopolistic competition.
10.
Two Minute Feedback
Take a minute and jot down the problem, idea, or concept that was
most interesting to you from this chapter.
Take another minute and jot down the problem, idea, or concept with which you struggled
the most.
