Price Discrimination

Price discrimination exist when sales of identical goods or services are transacted at different prices from the same provider

Example of price discrimination : Palestinian Studies Course at the Islamic University.

Ch 7 : Industrial Organization in Different Markets

Perfect competition market

Major Markets forms

Perfect Competitions : The market consists of a very large number of small firms producing product in the same domain.

No one, whether a consumer or a producer can affect the price.

Major Markets formsMonopolistic Competitions : it is when there are

large producers sell products that are differentiated from one another as goods but not perfect substitutes.

The number of producers is lower than in the case of perfect competition market.

Major Markets formsOligopoly : is a market form in which a market is

dominated by a small number of sellers (oligopolists).

The number of producers is lower than in the case of monopolistic competition market.

The sellers can affect the price using different ways.

Oligopsony (Buyrs’ Oligopoly): is a market form in which the number of buyers is small while the number of sellers in theory could be large.

This typically happens in a market for inputs where numerous suppliers are competing to sell their product to a small number of (often large and powerful) buyers.

Monopoly: It is when there is only one provider of product or service.

So the monopolistic firm can determine either price or quantities in the market , and is able to make higher profit than other types of markets like perfect competition market.

Natural Monopoly: A monopoly in which economies of scale causes efficiency to increase continuously with the size of the firm.

This will happen in the case of the natural resources or new technology.

Monopsony: is a market form in which only one buyer faces many sellers.

For example one firm buys raw materials from so many sellers.

Market Structure Sellers Entry barriers

Sellers numbers

Buyers Entry barriers

Buyers numbers

Perfect Competition No Many No Many

Monopolistic Competetion

No Many No Many

Oligopoly Yes Few No Many

Oligopsony No Many Yes Few

Monopoly Yes One No Many

Monopsony No Many Yes One

Perfect Competition market :

1. Atomicity : It means there are large number of small producers and consumers on a given market, each so small that its actions have no significant impact on others. ( Price taker ).

2. Goods are perfect substitutes:

The goods are homogeneous without any differences.

3. Perfect Complete Information :

All firms and consumers know the prices set by all firms. There is one price for the good in the market.

Equal access : There are no barriers to get technology

4. Equal access : All firms have access to production technologies and resources ( including information ) are perfectly mobile.

This means there are no barriers in the market

5. Free Entry and Exit:

Any firm may enter or exit the market as it wishes at any time without any barriers.

6. Transaction and fees costs are zero

This means that there is no transaction cost or fees for all operations in the perfect competition market.

7. The price is determined at the level that supply intersects demand curves. The firm is a price taker

In general, none of the condition above will be applied in the real markets.

The Equilibrium in the short Run in the perfect competition market

1. The totals Approach ( TR, TC )

Economic ProfitsTRTC

Slope = MC

Slope = MR

a

b

If MR = MC Profit maximization when MC increasesIf MR ˃ MC the firm should increase its productionIf MR ˂ MC the firm should decrease its production

The Equilibrium in the short Run in the perfect competition market

2. The Average Approach ( AR , AC )

© 2001 Claudia Garcia-Szekely 19

Economic Profits

MC

AVCATC

P=MR

ATC

AVC

Profit Max Output level = q*

© 2001 Claudia Garcia-Szekely 20

Economic Profits

MC

AVC

ATC

P=MR

ATC

AVC

q*Profit Max Output level

VC

FC

TCAVC x Q = VC

AFC x Q = FC

ATC x Q = TC

P

TR

P x Q = TR

Profit

TR – TC = Profit

© 2001 Claudia Garcia-Szekely 21

Breaking Even

MC

AVC

ATC

P = MR

P

q* Profit Max Output level

AVC

VC

ATC = P

TC = TR No loss or profit

TCTR

© 2001 Claudia Garcia-Szekely 22

MC

AVC

ATC

P = MRP

q* Profit Max Output level

AVC

VC

ATC

TC

TC

Economic Losses

LOSS

TR

Shut down Decisions in the Perfect Competition Market

© 2001 Claudia Garcia-Szekely 24

If TR > TVC

MC

AVC

ATC

P = MRP

q* Profit Max Output level

AVC

VC

ATC

FC

FC

TR

LOSS

© 2001 Claudia Garcia-Szekely 25

If TR < TVC

MC

P=MR

ATC

AVC

q*Profit Max Output level

P

Revenues are not enough to cover the variable cost

Loss > FC

LOSS

VC

TCFC

TR

Loss when producing q* is larger than the FC

© 2001 Claudia Garcia-Szekely 26

If price falls below AVC, producing at MC=MR will generate losses greater than

fixed costs.• P = minimum

AVC is called the firm’s shutdown point.

• The firm minimizes its losses by producing zero units.

Shut Down

P

Shutdown point

The Equilibrium in the Long Run in the perfect competition market

When firms enter attracted by profits Supply shifts right

P0MR0

ATC

MC

Profit

D

S0

S1

P1MR1

q0q1

Zero Profit

Price drops

Firms will enter until profits are zero

Firms will produce at the lowest ATC