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Monopoly: Price Searcher

Monopoly: Price Searcher. Weeks 13-14 Chapter 15. Demand Facing the Firm. $Price. Demand. $10 9 8 7 6 5 4 3 2 1. D. Qty/T. 1 2 3 4 5 6 7 8. Total Revenue. $Price. Demand. $10 9 8 7 6 5 4

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Monopoly: Price Searcher

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  1. Monopoly: Price Searcher Weeks 13-14 Chapter 15

  2. Demand Facing the Firm $Price Demand $10 9 8 7 6 5 4 3 2 1 D Qty/T 1 2 3 4 5 6 7 8

  3. Total Revenue $Price Demand $10 9 8 7 6 5 4 3 2 1 D Qty/T 1 2 3 4 5 6 7

  4. Marginal Revenue =Additional Revenue $Price Demand $10 9 8 7 6 5 4 3 2 1 D Qty/T 1 2 3 4 5 6 7

  5. Marginal Revenue $Price Demand D MR Qty/T

  6. Marginal Revenue & Elasticity $Price Ed > 1 Ed = 1 Ed < 1 Demand Qty/T MR

  7. Monopoly Output $Price Demand MC Pm Mc D MR Qm Qty/T

  8. Market Power: No Close Substitutes $Price MC Demand Pm Mc D MR Qty/T Qm

  9. Market Power: Few Close Substitutes $Price MC Demand Pm Mc D MR Qty/T Qm

  10. Market Power: Many Close Substitutes $Price MC Demand Pm D Mc MR Qty/T Qm

  11. Price Taker: No Market Power: Many Identical Substitutes $Price MC Demand P = MR P = Mc Qty/T Qm

  12. Monopoly Profit? Demand MC Pm Profit AC D MR Qm Qty/T

  13. Response to Profits • New firms enter with similar products • Demand declines and becomes more elastic • Price falls,output falls and profits decline

  14. Effect of Competition $P MC D AC Pm D MR Qm Qty/T

  15. Monopoly Efficiency Loss ? $Price Demand MC Efficiency Loss Pm Pc? D MR Qm Qty/T Qc?

  16. Sources of Monopoly • Natural Monopoly • Patents • Firm actions • Legal harassment • Exclusive licensing • Bundling

  17. Solutions • Government Price regulation • Enforcement of Anti-Trust Laws • Price Discrimination

  18. Price Discrimination • Charging different prices for different units sold. • Allows firms to increase sales and capture more of consumer surplus.

  19. First Degree: Charging different customers different prices. • Auction • College scholarships • IBM Punch Cards • Polariod Camera, Film • Ink Jet Printers, Cartridges • Swiffer, pads • Glllette Razor, Blades

  20. Second Degree: (Quantity Forcing) • Offering a schedule of prices to all buyers, which successively lowers the price for additional units, purchased (Moving down each buyers individual demand) • Tires: Buy 3, get 4th free. • Product prices, • medium16 oz. $ 1.09, .068125/oz. • large: 22 oz. $ 1.19, 6 oz. @ .0167/oz. • extra large:32 oz. $1.29, 10 oz. @ .01/ oz. • gulp: 44 oz. $ 1.49, 12 oz. @ .0167/ oz. • Toothpaste • Cereal • Coffee

  21. Third Degree: Identify Sub-groups Market A B P P P Pb Pm Pm Pm Da Pa MC MR D Db Qm Qa Q/t Qb Qm Q/t Qm Q/t

  22. Necessary Conditions for Successful Price Discrimination • Ability to identify and separate buyers by elasticity of demand. • Collect different prices from the different buyers • Prevent Resale

  23. Third Degree:Charging different prices to different groups according to different elasticity of Demand. • Grocery coupons • Prescription drugs in different countries. • Doctors medical services • Newly released unique products • Movies • Mail Order Catalogues • Freeway Adjacent Restaurant • Holiday Brand name mixers • Mattresses: Match any advertised price • Chinese Menu

  24. Economics of Advertising • Primary Economic Function: Lower Search and quality identification costs • Higher expenditure on Advertising tends to indicate higher quality • Branding is primarily a means of conveying a level of quality • Advertising can be used to create a characteristic in a product

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