Lecture Notes 10

Lecture Notes 10 - How Do Firms Become Monopolists Firms...

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How Do Firms Become Monopolists? Firms get to be monopolists in various ways: Government grants a monopoly position to a firm (cable TV companies in local communities, intellectual property like patents and copyrights) Economies of scale (concrete supply in a small town) Being more efficient than rivals in costs or quality Being first to produce a new product (iPod) Owning all of an essential input (De Beers diamond producer) Via merger with competitors Killing off or deterring competitors Many of these ways of initially capturing market power tend to erode over time
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The Monopoly Inverse Elasticity Rule demand of elasticity price the of reciprocal the Index) Lerner (or margin cost price the monopoly, maximizing profit a for 1 ) )( ( 1 ) )( ( ) ( = = - = - = - = + = E P Q Q P Q P P Q P MC P MC Q P Q P MR Indicates the degree of monopoly power for assessment of profitability and social welfare (for given fixed costs). E cannot be < 1 here. Monopolists want to price discriminate on basis of demand, subject to arbitrage.
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Price Discrimination Screening over personal characteristics correlated with elasticity of demand e.g. student tickets, golden-age discounts, geographic pricing (inner city, Staples, poor countries) Price discrimination via self-selection exploiting correlations between behavior and elasticities e.g. Grocery discounts via coupons, early-bird specials, first-run pricing, hard-back release of books
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