Lecture12
Országok listája
Hungary
Budapesti Corvinus Egyetem
Gazdálkodástudományi Kar
Nemzetközi gazdálkodás (angol nyelven)
Microeconomics
Jegyzetek
Lecture
Lecture12
2007.12.07 15:05:08
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Lecture 12
Price-making
TB: F Chapter 12 (Monopoly) pp. 407-452
1. Monopoly = price making
monopoly: a market structure in which a single seller of a product with no close substitutes serves the entire market
monopolist faces downward sloping demand curve
monopolist selects the best price or level of production
monopoly has market power
2. Factors that leads to monopoly
control over important inputs (essential facility)
economies of scale (natural monopoly)
patent
network economies
government license
3. Price setting
if price is not given, then what should the price be?
Single price or non-single price?
Linear price or non-linear price?
One part tariffs or two (multiple) part tariffs?
a marketing is complicated but interesting and essential (profitable) activity
Price setting:
Naiv theory of price setting: costs + margin
What should the margin be?
Economic theory of price setting:
Optimal price-cost margin
Optimal margin and price:
EMBED Equation.3
EMBED Equation.3
Lerner index: EMBED Equation.3
0 d" L d" 1
Another model for monopoly decision
monopoly product has just a single price
expenditures (revenues) are linear function of the single price
optimal quantity (and price)
An example:
FC: zero
VC = 10q
MC = 10 = AC = AVC
demand: q = 100- p
Inverse demand: p = 100 - q
p
100
D
55
10
45 50 90 100 q
MR
1) Set the price of a competitive market
MC = p = 10
Q = 90 À = TR TC = qAR - qAC=9010 - 9010
AR = TR/q = (pq)/q = p
2) Maximization of total revenues
max TR = pq = (a - bq)q=aq bq2
MR = 0 = a - 2bq
MR = 100 2q = 0
Q = 50 p = 50
TR = 50 50 = 2500
À = TR TC = 2500 500 = 2000
3) Maximization of profit
MC = MR
10 = 100 2q
q = 45 p = 55
À = TR TC = 4555 - 4510 = 2475 450 =2025
Price, marginal revenues and total revenues
p
p1
p2
q1 q2 q
5. Costs and benefit of monopoly
costs of monopolization
lower quantity
higher price
deadweight loss (DWL)
p
100
Deadweight loss
55
10
45 90 100 q
Qm < Qc pc < pm DWL
lower quality
higher costs
rent seeking (Tullock, Krueger)
Harberger (1954) DWL is less than 0.1 % of GNP (therefore monopoly cannot be a problem)
But rent-seeking may create huge losses
benefit of monopolization
monopoly profit may encourage more innovation
monopoly price induces competition
if entry is not blocked: even in short run
if entry is blocked: in the long run
6. Creating and maintaining monopoly
creation:
superior performance
luck
special knowledge (knowledge advantage, patent)
government license
natural monopoly (economies of scale)
C(Q) < C(q1) + C(q2) + ... + C(qk)
where Q = q1 + q2 + ... + qk
merger
strategic action
maintaining
superior performance
government protection
strategic action
7. Policy alternatives to regulate monopolies
state ownership
private ownership with government price regulation
MC pricing
AC pricing
competitive bidding by private firms for the right to be the sole provider of (monopolized) services
vigorous enforcement of antitrust laws designed to prevent monopoly
laissez-faire
8. Supply curve of a monopoly
a monopoly has a supply
but a monopoly does not have a supply curve
si-1(p) does not exist because p and q are not independent from each other
9. Optimal non-uniform and non-linear monopoly pricing
price discrimination
different consumers pay different price for the same product (non-uniform pricing)
different quantities of the same product are charged different unit price (non-linear pricing)
- why do firms use pricing strategies (price discrimination)?
Because it may increase profit.
- But, if a firm has market power (i.e. demand curve has a negative slope), than p and MR are declining, if the firm wants to sell more.
- Could not the firm sell more without necessarily reducing the unit price?
It could, if it price-discriminates.
- Conditions necessary for price discrimination
- market power
- customers with different propensity to pay
(reservation prices),
- separation and identification of consumers
(third degree price discrimination)
- prevention of arbitrage:
- resale is not possible (e.g. services)
- guarantee is for the first owner only (the price for new owners is higher)
- modified versions of products
- transaction costs
- transportation costs
- tariffs (exp-imp-smuggling)
- prohibition of contracting
- vertical integration
- government intervention
10. Optimal non-uniform and non-linear monopoly pricing
- Perfect (first degree) price discrimination
Everybody buys one unit only
- Qm = Qc
- no consumer surplus
- no DWL
- income redistribution
- profit is maximized (p = MR)
p
100
nyereség = fogyasztói többlet
55
10
45 90 100 q
Qc = Qm pi =RPi HTV = 0
Everybody buys more than one units
- two part tariffs (nonlinear pricing)
- entry (connection) fee
- user charge
- welfare effects
- Qm = Qc
- no consumer surplus
- no DWL
- income redistribution
- profit is maximized (p = MR)
- Imperfect (third degree) price discrimination
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- inability to distinguish each customer and charge different prices for them
- ability to separate consumer groups and charge them different prices.
Max = TR-TC = TR1 + TR2 - TC =
= [(p1q1)+(p2q2)]-TC(q1+q2)
FOC: MR1 = MR2 = MC
MR1 = p1(1+1/µ1)
MR2 = p2(1+1/µ2)
p1(1+1/µ1) = p2(1+1/µ2)
p1/p2 = (1+1/µ2)/(1+1/µ1)
that is, if µ2 > µ1 than p2 > p1
- Second degree price discrimination (new forms of non-linear pricing)
- expenditures change nonlinearly as quantity purchased changes (i.e. unit priZZ&Z(Z.Z0Z
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- firm does not need to know consumers demand
- consumers reveal their types
Prohibition of price discrimination
the myth of equity
cross financing
burden of social solidarity
a possible effect of prohibition of discrimination: discrimination (in the name of social equity)
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