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Chapter 15 powerpoint notes

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University of Ottawa
Gordon Lenjosek

Chapter 15 ppt notes: Things that include price discrimination: • Hydro • Airline flights What is a Monopoly? • Two characteristics: o A firm that is the sole seller of a product o The product it sells has no close substitutes • Biggest producer of diamonds is Russia Why Monopolies Arise • The main cause of monopolies is barriers to entry o Other firms can’t enter the market • Monopoly has to think of two things o How much do I produce and how much do I sell it for Monopoly Revenue • P=AR o Price is the same as Average Revenue • MR < P o Marginal Revenue is less than Price for Monopoly company Profit Maximization • Perfect competition: price is equal to marginal cost • As it increases output, it increase marginal revenue, but marginal revenue is lower than price • Profit maximizing Price Discrimination • Selling the same good at different prices to different buyers • A firm being able to set their own prices • In order to sell at different prices to different people, the monolpist needs to know willingness to pay of consumers • Read parable on page 329 • We can raise economic welfare if we alow monopolist to discriminate • Price – average cost Perfect price discrimination vs. single price monopoly • Less is produced, and total surplus is reduced • Because of monopoly, nobody gets the deadweight loss • The monopolist by being able to price discriminate will use the demand curve to decide how much to produce at what price • If we have PD all that net benefit is being taken away from consumers • Price- AC * level of output is maximizing the profit • You end up with efficient result • From economic point of view, this is efficient • Governments always regulate monopolists in order to not allow firms to sell a product to consumers for different customers • Society is maximizing net benefit • People are willing and able to pay different amounts Price Discrimination in the Real World • In the real world, price discrimination is not possible Examples of Price Discrimination • Coupons • Movie tickets: if you
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