Unit 4 Imperfect Competition Regulating Monopolies Why Regulate

Unit 4: Imperfect Competition

Regulating Monopolies

Why Regulate? Why would the government regulate a monopoly? 1. To keep prices low 2. To make monopolies efficient How do they regulate? • Use Price controls: Price Ceilings • Why don’t taxes work? • Taxes limit supply and that’s the problem

Where should the government place the price ceiling? 1. Socially Optimal Price P = MC (Allocative Efficiency) OR 2. Fair-Return Price (Break–Even) P = ATC (Normal Profit)

Natural Monopoly One firm can produce the socially optimal quantity at the lowest cost due to economies scale. P It is better to have only one firm because ATC is falling at socially optimal quantity MC ATC MR D QSocially Q

Natural Monopoly Unregulated P Fair Return PM Socially Optimal (No DWL) MC PFR ATC QSO MR QM QFR D QSocially Q

Regulating a Natural Monopoly What happens if the government sets a price ceiling to get the socially optimal quantity? P The firm would make a loss and would require a subsidy MC ATC Pso MR D Qsocially optimal Q

The Use of Knowledge in Society Read the article and consider the following questions. 1. What is the main problem that Hayek is pointing out in this article? 2. What conclusion does Hayek draw as a result? 3. How can this argument be applied to the discussion of how to regulate a natural monopoly?

Perfect Price Discrimination

Price Discrimination: Practice of selling the same products to different buyers at different prices Examples: • Airline Tickets (vacation vs. business) • Movie Theaters (child vs. adult) • All Coupons (spenders vs. savers) • HS football games (students vs. parents)

Price Discrimination Price discrimination seeks to charge each consumer what they are willing to pay in an effort to increase profits. Those with inelastic demand are charged more than those with elastic Requires the following conditions: 1. Must have monopoly power 2. Must be able to segregate the market 3. Consumers must NOT be able to resell product

P $11 Qd TR MR 0 0 -

Results of Price Discrimination $10 P $11 $10 Qd TR MR 0 10 10

Results of Price Discrimination $10 $9 P $11 $10 $9 Qd TR MR 0 1 2 0 10 19 10 9

Results of Price Discrimination $10 $9 $8 P $11 $10 $9 $8 Qd TR MR 0 1 2 3 0 10 19 27 10 9 8

Results of Price Discrimination $10 $9 $8 $7 P $11 $10 $9 $8 $7 Qd TR MR 0 1 2 3 4 0 10 19 27 34 10 9 8 7

Results of Price Discrimination P $11 $10 $9 $8 $7 $6 $5 $4 $10 $9 $8 $7 $10 $9 $8 $7 $6 $5 $4 Qd TR MR 0 1 2 3 4 5 6 7 0 10 19 27 34 40 45 49 10 $9 $8 $7 $6 $5 $4

For price discriminating monopolies, the MR equals the demand Price Demand = MR Quantity

Non Price Discriminating Monopoly vs. Price Discriminating Monopoly P MC ATC Pm D MR Qm Q

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand P MC ATC D MR Q

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand Identify the Price, Profit, CS, and DWL P MC ATC D =MR Qnm Q

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand Identify the Price, Profit, CS, and DWL P MC ATC D =MR Qnm Q

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand Identify the Price, Profit, CS, and DWL P MC ATC D =MR Price Discrimination results in several prices, more profit, no CS, and a higher socially optimal quantity Qnm Q

Is Perfect Price Discrimination In Our Future? Read the two articles linked below. How are online retailers using data to price discriminate? How does your online behavior indicate your price sensitivity?