The Task

• Expand analysis to account for market structure
  • number, size, and behavior of other firms
• Examine optimal choice in competitive environment
• Examine implications of competition

The Basics

• Parallel discussions: industry isthe firm
• Importance of time horizon: short run = long run
• Causes of monopoly: barriers to entry
  • Legal restriction
  • Patents
  • Control of Scarce resources
  • Deliberate entry barrier
  • Large sunk costs
  • Technical superiority
  • Economies of scale
• Demand: the firm = industry
  • MR < P

The Implications

• Optimal choice: maximize profit
  • output level (MR = MC)
  • profit level (area)

The Graphics

Perfect Competition vs Monopoly

• Monopoly 'Bads'
  • economic profit
  • restricts output
  • raises price
  • inefficient resoure use
• Monopoly 'Goods?'
  • shift demand
  • shift costs
  • innovation
  • economies of scale

Price Discrimination

• Why: to raise profit
• What: definition
  • charge different prices for product at same cost
    • example: airline fares
  • charge same price for products with different costs
    • example: Post office
• The mathematics of price discrimination
  • Optimal (maximum profit) condition
    • Mr_a = Mr_b = MC
  • Definition of MR
    • Mr_b = P_b (1+1/e_b)
    • Mr_b = P_b (1+1/e_b) = Mr_a = P_a (1+1/e_a)
    • P_b (1+1/e_b) = P_a (1+1/e_a)
    • P_b = P_a (1+1/e_a) / (1+1/e_b)
    • If e _a > e _b then P_b > P_a
  • Firms charge a higher price in market segments where demand is less responsive to price changes

The Graphics

Revenue, Cost, and Profit Data

Return to our university example, this time where we allow our university to be the sole supplier of education in the market. In this situation we find that the university faces a downward sloping demand curve-tuition and students are negatively related. Once again we cannot use the decision rule (MR=MC), but rather we continue to expand the level of output as long as MR>MC. The optimal size of the university is 9800 students and the university is making a profit of $37,040