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wk7.pdf-Monopoly & Price Discrimination Ram Shivakumar
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wk7.pdf-Monopoly & Price Discrimina...
wk7.pdf-Monopoly & Price Discrimination Ram Shivakumar
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Monopoly & Price Discrimination
Ram Shivakumar
University of Chicago
1

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Questions
How can you know whether a firm is a monopoly?
What does it take to get a monopoly? Keep it?
Examples of monopolies?
Is a monopoly a good or a bad thing (from a societal view)?
What does the patent system do?
Why do we award patents & copyrights?

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(Near) Monopolies

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Monopoly
Single seller; operates in a market characterized by
High
barriers to entry
Markets with
no good
(or close) substitutes
Barriers to entry
Factors that make it
unprofitable
or
impossible
to enter
Allows incumbents to earn
supra-normal
profits
Sources of monopoly power
Controlling a key input
Product differentiation
Network externalities

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Sources of monopoly power
Hevea brasiliencis

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6
Some facts on monopolies
Recall that AR = TR/q = (P*q)/q = P for all firms
For a monopolist, P
MR
MR = dTR/ dq
=
P(Q) + q dP/dq
But dP/dq
0 for a monopolist; why?
Hence P = AR
MR for a monopolist
The profit maximization conditions for a monopolist are the same as for
the competitive firm
Set MR = MC
Check second order conditions to ensure that we are at a maximum
If the firm will incur a loss from production, compare these losses with the
losses from shutting down

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7
MR and AR
The market demand curve is the
demand curve the monopolist
confronts
MR lies below AR curve.
Monopolist recognizes that every
incremental unit it produces
on
all
its units
P
Q
The market demand
curve, P = AR
MR curve lies below AR
curve

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8
Operations: a monopolist’s perspective
Q
P
TR
MR
TC
MC
Π
0
0
-
-
50.00
0
-50.00
1
25
60.00
2
24
69.00
3
23
77.00
4
22
84.00
5
21
90.50
6
19.75
96.75
7
18.50
102.75
8
17.25
108.50
9
16.00
114.75
10
14.75
121.25
11
13.50
128.00
12
12.25
135.00
13
11.00
142.25

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9
Operations: a monopolist’s perspective
Q
P
TR
MR
TC
MC
Π
0
0
-
-
50.00
10.00
-50.00
1
25
25
25.00
60.00
10.00
-35.00
2
24
48
23.00
69.00
9.00
-21.00
3
23
69
21.00
77.00
8.00
-8.00
4
22
88
19.00
84.00
7.00
4.00
5
21
105
17.00
90.50
6.50
14.50
6
19.75
118.50
13.50
96.75
6.25
21.75
7
18.50
129.50
11.00
102.75
6.00
26.75
8
17.25
138.00
8.50
108.50
5.75
29.50
9
16.00
144.00
6.00
114.75
6.25
29.25
10
14.75
147.50
3.50
121.25
6.50
26.25
11
13.50
148.50
1.00
128.00
6.75
20.50
12
12.25
147.0
-1.50
135.00
7.00
12.00
13
11.00
143.00
-4.00
142.25
7.25
.75

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10
An example
Suppose Q = 10 - .4P and MC = 5Q
What is the monopolist’s revenue function?
Cost function?
First-order condition? Second-order condition?
How much will the monopolist produce?
What price will the monopolist charge?
Draw a picture

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