hello and welcome back to our discussion on monopoly outcomes we discussed in the last
class that monopoly outcome is inefficient for the market it does not maximize welfare
in the market and we discussed that perfectly competitive outcome is always uh much better
than a monopoly outcome because in the case of a competitive outcome the output is much
more than the monopoly output and the price is much less than the monopoly price and both
productive efficiency and allocative efficiency are achieved in the case of a perfectly competitive
outcome so uh today but throughout this discussion
if you remember when we discussed in the first uh couple of lectures uh in monopoly when
we discussed about profit maximization and when we discussed about the marginal revenue
we made a very important assumption if you may remember and i did not go into too much
details of the assumption so let me recapitulate that assumption right now
i said that when we are discussing about marginal revenue and when we are talking about the
output effect and the price effect there is a very important assumption we are making
and that assumption is when the monopolist has to reduce the price because he is increasing
the amount of output in the market he has to reduce the price for all the consumers
it does not happen that he gets to charge a higher price to the consumers who are high
up on the demand curve so let me explain . so if this is the demand curve and this is
the marginal revenue curve and this is the demand curve this is the marginal revenue
curve and this is the marginal cost this is the monopoly output and monopoly price so
here we discussed so this is the equilibrium so this is the equilibrium uh for the monopolist
but here the assumption is when he is producing output of q m he has to charge this price
p m to all the consumers who are here so he so we know on the demand curve there
are some consumers who are high up on the demand curve who are willing to pay a very
high price for the product they are willing to pay very high price for the same product
so when the monopolist is charging a price of p m these consumers over here who are getting
to stay in the who are getting the product from the market they are having to pay a price
which is less than their willingness to pay because p m is less than every consumer’s
willingness to pay except the last consumer whose willingness to pay is exactly equal
to p m so that is the reason that this consumer surplus
stays in the market and these buyers actually get a consumer surplus out of buying the product
from the monopolist so now what happens if we relax this assumption What happens if we
say that the since monopolist is the only single seller in the market also we know that
the monopolist knows what the demand curve is
so now assume that the monopolist knows what is the what is there in every point of the
demand curve he knows who all are the buyers who are willing to pay these prices on this
demand curve if that is possible if that situation is possible and say the monopolist is able
to charge a price that each of them is willing to pay since he is the only seller in the
market so it is possible for him to actually charge different prices to different buyers
so say he knows by the look look on the face of the buyer that this person is willing to
pay a higher price for the product that i am selling than his than the next person .
so if such a situation is possible then he gets to charge prices so if that is possible
for the first unit he is going to charge this person very high p 1 say the next unit the
next person is or say the next few people they are willing to pay p 2 so the next person
is for next few people are willing to pay say uh p 3 so he gets to he say for example
he is a single seller in the market He knows the uh the market and his consumers through
and through and he knows how much each one is willing to pay and he charges those prices
to each of these buyers in that case what is his revenue in that case what he gets is
he gets p 1 so basically what he gets his revenue in that
case is this entire amount he gets then the p 2 q 2 then say p 3 q 3 so this way he is
going to get the entire revenue is his so he gets to charge each and every person so
the entire amount that is entire revenue in the market is this entire area now the next
question is so the last person so nothing changes for the last person because he was
willing to pay p m and he is having to pay p m so 2 things are happening here .
so the first question is what is happening to the consumer surplus that we drew in the
previous class uh this was the consumer surplus in the previous class we drew that this is
the consumer surplus in case of a monopoly outcome and we said that i don’t remember
what colours i used but let me draw a new one and we said that
this area is the was the producer surplus so we said this was the producer surplus and
this was the consumer surplus in the case where the monopolist has to charge the same
price to all the consumers but in case of a perfectly price discriminating
monopolist or where the monopolist actually charges different price to different consumers
that is the monopolist charges different prices to different consumers so in that case this
entire amount he is being able to get where that will be his revenue and what happens
to consumer surplus . now consumer surplus then gets wiped off so
the consumer surplus now gets wiped off because no one gets anything so no consumer gets any
surplus because every consumer is having to pay what he is willing to pay so hence this
entire area becomes the producer surplus so this entire area becomes the producer surplus
and in case you are wondering what is this area this is basically his cost marginal cost
this is his marginal cost so this part is what he is spending to produce the output
this is this is his expense so the producer surplus is the blue area
now my next question is so in case of a price discriminating monopolist we understand that
the monopolist is basically eating away the entire consumer surplus but my question here
is is he then going to produce q m is he going to stop his production at q m like we saw
in the case of profit maximization mR is equal to mc so does he keep does he stop at q m
or is there any chance that he is going to produce more
so what so what goes on in the mind of the monopolist What is the logic there the logic
is since he is able to charge what the firm what the buyer is willing to pay it makes
sense for him to keep on producing because if he produces the next unit of output and
price falls he does not have to reduce the price for all the buyers preceding this uh
output he does not have to reduce the price for all the buyers
so it makes sense he knows that he has already sold q m to all these buyers who who paid
him a much higher price but to sell it to the next buyer he has to reduce the price
and the next buyer is going to going to pay a smaller price and buy some additional output
but that does not change anything for the preceding buyers
so he is going to sell the next unit of output and he keeps on selling it makes sense for
to him to keep on selling till he reaches the point where marginal cost intersects the
price line so what is this equilibrium so what is this point this point is the same
as the perfectly competitive equilibrium and the output that he produces here which is
the perfectly competitive output so the output that he produces here is the
perfectly competitive output and uh so this is the competitive uh perfectly competitive
output and he charges the so price is prices are different for different consumers but
the output that is getting produced here is the same as the q pc
now what happens is he going to sell the next unit of output as well No that is that he
is not going to do because beyond this q pc his marginal cost of producing the output
is more than the price that he is going to get out of it so he is not going to produce
beyond q pc amount of output so here q monopoly output is also equal to q pc so lets uh look
at the slides now before i move on with the diagram .
now so price discrimination price discrimination means charging different prices for the same
product to different consumers depending on their willingness to pay perfect price discrimination
happens when the monopolist knows each and every consumers willingness to pay and is
able to charge that to the consumer now entire consumer surplus is wiped out by the monopolist
in this case but like perfect competition total welfare in the market is maximized on
the case of the price discriminating monopolist and there is no deadweight loss .
now let me explain a little bit about the last 2 points that we have discussed here
if you remember the diagram that we drew in the earlier class our deadweight loss was
this portion our deadweight loss was this triangle but in case of a perfectly price
discriminating monopolist there is no deadweight loss because he keeps on producing till q
pc and the total welfare in the market is this entire triangle so what is the difference
in welfare between the competitive output and perfectly price discriminating monopolist
output so lets see . so in case of competitive output competitive
uh uh in case of competitive market you have
total welfare is equal to producer surplus plus consumer surplus let me write here c
for competition and this is price in case of competition and q let me call it q c so
in case of uh in a case of competitive output let me now name the triangles say this is
e this is a b so in case of total welfare in case of competitive output producer surplus
is this triangle bpcE and consumer surplus is this triangle that is apce so total welfare
is equal to abE . now what happens in case of the monopolist
in case of monopoly total welfare is equal to producer surplus plus let me write producer
surplus in case of monopolist this is perfectly price discriminating monopolist so let me
write pdm and this is consumer surplus in case of price discriminating monopolist
so what is the producer surplus in case of a price discriminating monopolist it is basically
this entire area he is able to wipe out the entire consumer surplus so this entire area
of abe is his producer surplus and consumer surplus is zero consumer surplus is zero so
in both the situations total welfare is exactly the same
total welfare is this triangle abE so total welfare is equal to abe but uh consumer surplus
is equal to zero in case of a perfectly price discriminating monopolist so uh should that
make any difference so the next question is should that make any difference because total
welfare in the economy is still the same in both the cases because uh the the our allocative
efficiency is achieved because this is a this is the output is exactly the same as the competitive
output so both our productive and uh allocative efficiencies
are achieved because the every buyer is paying what he is willing to pay and for that unit
of output he is the the uh and finally the producer is producing till the point where
price is equal to the marginal cost so productive and allocative efficiency is achieved in this
situation the only difference is if in the eyes of the economy there is difference between
the producer and the consumer then probably there is difference between the two outcomes
but if we do not uh differentiate between a producer and a consumer but in that case
total welfare is the same in the case of price discriminating monopolist as in the case of
the perfectly competitive uh output so now this is a price discriminating monopoly
so uh so at least in the case of price discriminating monopolies there is no deadweight loss so
we know that monopoly output is not as good as the competitive outcome but at least price
discriminating monopolist outcome is better than the monopoly outcome and it is close
to the competitive outcome in the sense that the total surplus for the economy still remains
the same now does price discrimination happen in the
real world so we have said here that the monopolist knows each and every buyers willingness to
pay but is that possible no that is perfect price discrimination is not possible in the
real world because uh no buyer is going to reveal his real preference to the buyer uh
to the seller He is not going to say that yes i really really need want your uh product
and i am going to pay as high a price as this so uh it is not possible for a seller to uh
actually know the exact willingness to pay of each and every buyer but there are ways
in which the sellers basically figure out the the willingness to pay of different categories
of consumers . so uh say price perfect price discrimination is not possible in the real
world because the buyers do not reveal their true willingness to pay However firms can
categorize buyers on the basis of some observable traits and price discriminate .
so lets take some examples say for example the intertemporal price discrimination so
price discrimination intertemporal price discrimination can happen when the uh intertemporal price
discrimination basically means that the seller is discriminating across different time of
selling the products say different prices of movie tickets for different show timings
now the assumption of the seller is uh the busier people are richer people and who have
better willingness to pay for say movie tickets or entertainments but they cannot come in
the morning during the weekdays during the morning hours when they are working
so it is better to charge higher prices in the evening shows when these busy people who
are basically earning people will turn up for the movies and the morning timings show
morning show timings afternoon show timings are for people who are usually either students
or retired uh people or homemakers who do not have uh such high level of income and
probably lesser willingness to pay or lesser ability to pay so these are the people who
the the sellers are trying trying to uh categorize by selling the movies uh movie tickets at
a lower price in the morning hours similarly airline ticket discounts to weekend
travellers so weekend travellers are usually people who are travelling for personal reasons
maybe holiday or vacation travellers or who are paying from their own pockets uh in contrast
business travellers who usually travel during the weekdays so the weakened travellers weekend
airline tickets are usually cheaper high priced hard cover editions are launched
first and low price paperback editions are released much later so often we see that if
there is uh bestselling authors books is coming up it is going to be launched initially the
people who are really really hardcore fans of the uh author they are really waiting eagerly
for the book and they would like to buy it as soon as it is launched so to charge a higher
price to these groups of readers often the book is launched in hard covers with some
fancy uh jacket etc and the the (price) the cost is not so much higher uh than the ordinary
paperback version but the price is considerably higher
so the purpose is to target or categorize or differentiate between 2 categories of buyers
one is more price sensitive who are patiently waiting for the prices to come down and then
they can buy the paperback version and the other people who are willing to pay a much
higher price for the to read the book uh to be one of the first people to read the book
in the market second is discriminating for price sensitive
buyers so typical example is coupons and discounts we often see that there are fliers or coupons
which are uh mailed or distributed at departmental stores and it is said that if you really want
this discount or coupon please mail it back to the seller or mail it back to the company
and you get the discount you get a cash back or something like that the purpose is people
who are really busy are not so much price sensitive they would not bother to respond
to these coupons they will probably throw it away as opposed to people who are really
price sensitive and who would take the time to fill up these coupons mail them to get
that additional discount another example is the peak load pricing as
happens in case of specially electricity uh uh in the case of pricing of electricity so
price of electricity consumption at different times of the day so capacity constraint may
cause the marginal cost to be high at these times so this is slightly different from the
examples that we have taken in the earlier uh we have taken earlier in the other kinds
of situations where the assumption is cost is not so much different but basically the
seller is categorizing people on the basis of their willingness to pay but our last example
is where let me quickly draw it .
the last example is kind of interesting that uh so it is possible that uh so at at normal
times this this is the demand for electricity which is uh probably inelastic that there
is there the people are sensitive about the price of electricity and they are going to
use it uh so so this is where it is like a uh necessary good so it is inelastic and we
have the marginal cost curve now at low amount of generation so this is
the uh quantity that is uh sold here and this is the price that is being charged but what
happens when there is too much too high demand for electricity so our demand curve would
be somewhere here so in that case our marginal cost has gone up You will see that with higher
levels of output the cost is going up and so here for here the price is different
so you have a higher amount of output that is produced so this is d and this is peak
load d so this is peak load d and peak load price so basically there are what is being
said is there are 2 categories of uh consumers who are consuming the electricity and this
is in peak load the demand is too high and hence the cost that is being incurred by the
seller is also high so he charges a very high price for this uh for uh peak load electricity
generation and supply so this was our example we are going to discuss
lot of more different uh ways in which the the not only a monopolist but also any producer
who has some amount of market power what are the various innovative ways that the sellers
with uh at least some amount of market power they come up with to price discriminate across
different categories of consumers so these examples we are going to take up
later once we have discussed the different kinds of market structures and look at the
different amount of market power different levels of market power that a seller could
have because in the monopolist is a very extreme case where he has complete market power but
at least but in situations where there are a few sellers in the market there also the
sellers have some amount of market power and they come up with lot of ideas to discriminate
across different categories of consumers and try to make a as much profit as possible
in the following section we are going to talk about what the government does to see to it
that the monopolist does does not uh charge too high a price and monopolist can be regulated
so that consumer welfare is at least improved if not the competitive output cannot be achieved
but at least some amount of welfare improvement is possible is uh is attempted by the government
through public policies and regulation thank you