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# Q δ p δ q p p q p δ p δ q q p δ p δ q is the

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+ Q . Δ P Δ Q = P + P Q P . Δ P Δ Q Q P . Δ P Δ Q is the reciprocal of the elasticity of demand , 1 E d , measured at the profit-maximizing output Therefore: MR = P + P . 1/ E d ( ) = MC at the profit-maximizing output Which can be rearranged to give us: P MC P = 1 E d , which is Lerner’s index of monopoly power this can also be expressed as P = MC 1 + 1/ E d ( ) A monopolist charges a price that exceeds marginal cost, but by an amount that depends inversely on the elasticity of demand. Note that a monopolist will never produce a quantity of output that is on the inelastic portion of the demand curve - less than 1 in absolute value. Monopoly power - the ability to set price above marginal cost and that the amount by which price exceeds marginal cost depends inversely on the elasticity of demand facing the firm. The less elastic its demand curve, the more monopoly power a firm has. Three factors influence a firm’s elasticity of demand Elasticity of market demand The numbers of firms in the market The interaction among firms The Effect of a Tax Under a monopoly, price can sometimes rise by more than tax. Suppose a specific tax of t dollars per unit is levied, so that the monopolist must remit t dollars to the government for every unit it sells. Optimal production is now given by: MR = MC + t The marginal cost curve will shift upward by an amount t, resulting in a smaller quantity and a higher price. Verspreiden niet toegestaan | Gedownload door Jordevie Uvs ([email protected]) lOMoARcPSD
The Social Costs of Monopoly Power Natural monopoly is a firm that can produce the entire output of the market at a cost that is lower than what it would be if there were several firms. Pure monopoly is rare, monopoly power (firm’s demand curve) depends on: price elasticity of market demand. number of (potential) competitors on the market: concentration of industry (# of ‘big’ players) natural barriers to entry (e.g. high set-up cost) legal barriers to entry (e.g. protective laws) form of interaction between firms: fierce competition explicit or implicit collusion Note: Large monopoly power does not necessarily imply high profits (cost curves!). In competitive markets, price regulations generally creates a deadweight loss. In case of a monopoly price charged by monopolist is above marginal cost - social cost Price regulation may bring price down to marginal cost. Verspreiden niet toegestaan | Gedownload door Jordevie Uvs ([email protected]) lOMoARcPSD
Chapter 11 Pricing with Market Power All pricing strategies have one thing in common: they are means of capturing consumer surplus and transferring it to the producer. Price discrimination = the practice of charging different prices to different consumers for similar goods Price discrimination can take three broad forms: 1. First-Degree price discrimination If a firm could, it would charge eacht customer the maximum price that the customer is willing to pay for each unit bought - or reservation price.