Tag Archives: quantity output

Price Discrimination

24 Jul

Price Discrimination

      In all previous articles I assumed that monopolists charge a single price to all buyers. But under some conditions monopolists can increase their revenues by charging different prices to different demanders.  By doing this kind of act monopolist is engaging in price discrimination, the practice of selling of the same product to different buyers when the price difference aren’t justified by difference in cost.
   In order to engage in price discrimination there are some conditions that must be realized:

  • Market segregation– the seller should be able to differentiate the buyers into different classes, each of them having different wants and abilities to pay for the product.  This division of buyers is usually related to different elasticities of demand.
  • Monopoly power– another important characteristic is that seller should be a monopolist or at least to possess some monopoly power, so that he may control the quantity output and the price.
  • No resale-The original buyer mustn’t be able to resell the good or service. Otherwise, if the buyer from low-price segment is able to sell the goods purchased to buyers from high-price segment, then our seller will have some competition in high-price segment. This competition will reduce the price and will cancel seller’s price discrimination policy.

Examples of Price Discrimination
   Some movie theatre or golf clubs differentiate their charge on the basis of time ( lower rates in the night and higher rates in the evening) and age(younger- lower ability to pay, so less money is charged).  Another example can serve railroads where shipper of 1 tone of jewelry is charge more than a shipper of 1 tone of tomatoes.

Consequences of price discrimination
   Monopolist can increase its revenue by practicing price discrimination. At the same time, perfect price discrimination results in an increase of output. In this case each consumer pays the price that he or she is willing rather than to forgo the product.
   Other things equal, the monopolist that practices perfect price discrimination is producing a higher quantity of output than the monopolist that isn’t practicing it. When the non-discriminating monopolist lowers its price to sell additional unit, this lower price is applied not only to additional output but also to the prior units. So the non-discriminating monopolist’s marginal revenue falls more rapidly than the price and, marginal revenue, graphically, lies below demand curve. However when a discriminating monopolist lowers its price, this reduced price is applied only to additional units sold not to prior units. Thus marginal revenue equals price for each unit of output, graphically MR and Demand curve coincide.
   Although price discrimination results in more economic profit than that achieved by single price monopolist, it also results in greater output, so less allocative inefficiency.

Price Discrimination

Price Discrimination

Output and Price Determination in Pure monopoly

21 Jul

Pure Monopoly output and price determination
So at what price-quantity combination will pure monopolists choose to operate?
     MC=MR Rule
The monopolist seeking to maximize its profits will have the same rationale as a firm in a competitive industry. It will produce one more unit of output only if it adds more to total revenue than to total cost. The firm will increase its output till the point where MR=MC.
One more way to find profit-maximizing output is by comparing total revenue and total cost at each quantity of production. The quantity for which this difference has the greatest possible value is the one which offers maximum profit.
No Monopoly Supply Curve
   In pure competitive market MR=P (price) and supply curve of a pure competitive firm is determined by applying P=MR=minimum ATC profit-maximizing rule, so in a pure market the seller will maximize profit by supplying the amount of goods for which MC= P. Thus, in a pure competitive market the amount of goods produced depends on the price.
   We may say that pure monopolist’s marginal-cost curve will be also its supply curve, but it is wrong. The pure monopolist has no supply curve, because there is no a unique relation between quantity supplied and price set by a monopolist. Like pure competitor firm, monopolist equalizes MR with MC to determine the quantity output, but for monopolists marginal revenue is less than price. Also, because monopolist doesn’t equalize marginal cost to price, it may have different prices for the same amount of output.

Misconceptions about Monopoly Pricing
Highest Price
   People often believe that monopolists will try to get highest possible price for their goods and services, because they can manipulate price, but this statement isn’t correct. There are some prices for which monopolists will get smaller-than-maximum profit, so they will try to avoid them. Monopolists are trying to get maximum total profit, but not maximum price. Some High prices will reduce dramatically quantity sold and total revenue, so that monopolists will try to produce a decrease in cost.
Profit
   Monopolists seek maximum total product, not maximum unit profit. They will choose smaller unit profit, not the maximum one, because additional sales add to total revenue. For example a profit-seeking monopolist will sell five units of a good at 37$ (total profit 185$) than four units at 40$ (total profit 160$)
Losses
   Monopolists are more likely to get economic profit than pure competitor.  In long run pure competitor is destined to get only normal profit, but price adjustment ability and barriers at entry at monopolists offer them possibility to get economic profit.
   But pure monopoly doesn’t always guarantee profit. It is neither immune to change in taste of consumers that reduces demand for the product nor to change in price of resources. So an industry can suffer great losses because of relatively low demand and high resource prices.
   Like pure competitors, monopolists won’t continue to operate in an industry where they get continued losses. So if they are faced with this situation, pure monopolists may move their resources to alternative uses that offer better opportunities for economic profit. Thus, monopolies can also realize normal profit in long run.

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