Monopoly, setting quantity

1. Monopoly, setting quantity X

2. Inverse demand function p demand function inverse demand function X

3. Revenue, costs and profit • Revenue: • Costs: • Profit:

4. Marginal revenue with respect to quantity • goes up by p, • but goes down by dp/dX (the quantity increase diminishes the price) multiplied by X When a firm increases the quantity by one unit, revenue Amoroso-Robinson relation:

5. Exercise (marginal revenue) State three cases where the marginal revenue equals the price.

6. First order condition • Notation:

7. Linear demand curve in a monopoly • Demand: • Revenue: • Marginal revenue:

8. Exercise (Depicting the linear demand curve) • Slope of demand curve: .... • Slope of marginal revenue curve: .... • The .... has the same vertical intercept as the demand curve. • Economically, • the vertical intercept is ..., • the horizontal intercept is ... .

9. Depicting demand and marginal revenue a 1 b 2b 1 a/(2b) a/b

10. Depicting the Cournot monopoly Cournot point

11. Profit in a monopoly Marginal point of view: Average point of view:

12. Exercise (monopoly) Consider a monopoly facing the inverse demand function p(X)=40-X2. Assume that the cost function is given by C(X)=13X+19. Find the profit-maximizing price and calculate the profit.

13. Price discrimination • First degree price discrimination: • Second degree price discrimination: • Third degree price discrimination: Every consumer pays a different price which is equal to his or her willingness to pay. Prices differ according to the quantity demanded and sold (quantity rebate). Consumer groups (students, children, ...) are treated differently.

14. Inverse elasticities rule for third degree price discrimination Supplying a good X to two markets results in the inverse demand functions p1(x1) and p2(x2). Profit function: First order conditions: Equating the marginal revenues (using the Amoroso-Robinson relation) leads to:

15. Exercise I(price discriminating monopoly) A monopoly sells in two markets: p1(x1)=100-x1 and p2(x2)=80-x2. The cost function is given by C(X)=X2. a) Calculate the maximizing quantities and the profit at these quantities. b) Suppose now that the monopoly plant is decomposed into two plants, where each plant sells in one market independently (profit center). Calculate the sum of profits.

16. Exercise II(price discriminating monopoly) c) Assume now that the cost function is given by C(X)=10X. Repeat the comparison. d) What happens if price discrimination between both markets will not be possible anymore? Find the profit-maximizing quantity and price. Consider the cost function C(X)=10X. (Hint: Differentiate between quantities below and above 20.) Oz Shy; Industrial Organization

17. Solution I(price discriminating monopoly) a) b)

18. Solution II (price discriminating monopoly) c) In each case: b) 100 90 50 10 20 50 80 100

19. Exercises (price cap in a monopoly) How does a price cap influence the demand and the marginal revenue curves?

20. Right or wrong? Why?

21. Solution (price cap in a monopoly)

22. Taxes on profits

23. Exercise (quantitiy taxes) A monopoly is facing a demand curve given by p(X)=a-X. The monopoly’s unit production cost is given by c>0. Now, suppose that the government imposes a specific tax of t dollars per unit sold. a) Show that this tax would raise the price paid by consumers by less than t.b) Would your answer change if the market inverse demand curve is given by p(X)=-ln(X)+5. c) If the demand curve is given by p(X)=X-1/2, what is the influence on price? Oz Shy; Industrial Organization

24. Illustrating the solutions a) b)