monopolies, cartels, and price discrimination

Question 1

monopolist demand curve

Answer 1

negatively sloped - tradeoff between price it charges and the quantity it sells:

TR = p x Q (if all units are sold for the same price)

Question 2

revenue for monopolist

Answer 2

• AR = TR/W (p x Q)/Q = p
• since the demand curve shows the price of the product, the demand curve is also the monopolist’s average revenue curve
• MR = change in TR / change in Q
• since there’s a negative demand curve, the monopolist must reduce the price it charges on all units to sell an extra unit

Question 3

profit-maximizing output

Answer 3

the Q* when MC = MR

• price is determined by the demand curve
• since price exceeds average total cost, this monopolist is making an economic profit

Question 4

short-run profit maximization

Answer 4

• a monopolist doesn’t have a supply curve cause it’s not a price taker (firm)
• a monopolist chooses its profit-maximizing price-quantity combination from among the possible combinations on the market demand curve

Question 5

differences b/w monopoly and competition

Answer 5

• level of output in monopolized industry is less than in a perfectly competitive market
• in competition, price = marginal cost
• in monopoly, price is greater than marginal cost
• a monopolist’s profit-maximizing decision to restrict output below the competitive level creates a deadweight loss (DWL) (loss of economic surplus

Question 6

cartels

Answer 6

• a coalition of firms that agree to restrict output for the purpose of earning an economic/excess profit
• these agreements aren’t legally enforces, and are unstable
• everyone wants to cheat other firms within the collective
• if everyone cheats, the price falls back toward a competitive level, and join profits won’t be maximized
• successful cartels prevent entry of new producers and license the firms in the industry

Question 7

price discrimination

Answer 7

• charging different buyers different prices for the same good/service
• happens under two conditions:
  1. separate market into submarkets each with different demand curves and charge a different price in each; or
  2. prevent buyers from buying at a low price in one submarket and reselling at a higher price in another submarket

Question 8

types of price discrimination

Answer 8

• among units of output: “two for the price of one”
• among market segments: hardcover/softcover, evening/matinee shows
• hurdle pricing: firms create an obstacle that consumers must overcome to get a lower price: coupons

Question 9

perfect price discrimination

Answer 9

• monopolist will charge consumer with exactly what they’re willing to pay for that good
• production level will be the same as in the case of the perfectly competitive market (P = MC) but the consumer surplus vanishes completely - all economic surplus becomes producer surplus
• no deadweight loss

Question 10

consequences of price discrimination

Answer 10

• a monopolist that price discriminates among units will produce more output than a single-price monopolist
• if price discrimination leads the firm to increase total output, the total economic surplus generated in the market will increase, and the outcome will will be more efficient