17-Monopoly

17-Monopoly - Agenda Course Overview Monopolys pricing...

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1 Agenda • Course Overview • Monopoly’s pricing decision • The Multi-plant Monopolist • The Multi-market Monopolist • Social Cost of Monopoly • Monopsonist Buyer • What to take away Microeconomics The Structure of the Course Consumers and Producers Market Interaction Today’s lecture Uncertainty Perfect competition Monopoly and Pricing strategies Competitive Strategy Auctions Information in Markets and Agency Game Theory Introduction to Markets Consumer Theory and Demand Technology and Production
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2 Monopoly One seller - many buyers One product (no good substitutes) Barriers to entry Price Maker The monopolist is the supply-side of the market and has complete control over the amount offered for sale Monopolist controls price/quantity but must consider consumer demand Profits will be maximized at the level of output where marginal revenue equals marginal cost Monopoly Agenda • Course Overview • Monopoly’s pricing decision • The Multi-plant Monopolist • The Multi-market Monopolist • Social Cost of Monopoly • Monopsonist Buyer • What to take away
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3 Marginal Revenue As the sole producer, the monopolist works with the market demand to determine output and price What is the marginal revenue from selling one more unit of output? The monopolist will be able to get (approx.) the market price for that unit but needs to reduce the price for the units it was already selling This captures the trade-off facing the monopolist: to increase sales, price must fall (for all units sold). Note that (inverse) demand P=P(Q) gives you the “average revenue” per unit sold. Comparing then “average revenue” and “marginal revenue” we have that MR<P .   R P P Q Q P P Q Q P dR dP MR P Q dQ dQ            Marginal Revenue: An Example Suppose that a monopolist faces an (inverse) linear demand P=6-Q. Then revenue is given by PQ=6Q-Q 2 . Marginal revenue is MR=6-2Q Note: MR<P Output 1 2 3 4 5 6 7 0 1 2 3 $ per unit of output 4 5 6 7 Average Revenue (Demand) Marginal Revenue
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4 Pricing decision Profits maximized at the output level where MR = MC Example 2 ( ) 50 2 Cost C Q Q dC MC Q dQ     2 : ( ) 40 ( ) ( ) 40 40 2 Demand P Q Q R Q P Q Q Q Q dR MR Q dQ  10 2 40 2 Q Q Q MR MC 30 ) ( 40 ) ( Q P Q Q P A Rule of Thumb for Pricing We want to translate the condition that marginal revenue should equal marginal cost into a rule of thumb that can be more easily applied in practice Recall that we could express market marginal revenue as a function of the price elasticity of demand, as: 1 1 1 D D dP Q dP Q dP MR P Q P P P dQ P dQ P dQ P dQ E Q dP MR P E    
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5 A Rule of Thumb for Pricing Profits are maximized when MR=MC , which implies that Recall (P – MC)/P is the markup over MC as a percentage of price
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This note was uploaded on 11/30/2010 for the course ECON 251 taught by Professor Tontz during the Fall '10 term at USC.

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17-Monopoly - Agenda Course Overview Monopolys pricing...

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