[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

A
B
REVENUES, COSTS ($)
30,000
28,000
24,000
20,000
Total
revenue
curve
Profits
Total
cost
curve
PRICE ($)
9,000
8,000
pm = 7,000
6,000
5,000
A
Demand curve
Average
cost curve
B
D
C
0 1 2 3
Q m = 4 5 6
QUANTITY (THOUSANDS OF CUBIC YARDS)
0 1 2 3 Q m = 4 5 6
QUANTITY (THOUSANDS OF CUBIC YARDS)
Figure 12.5
PRICE EXCEEDING AVERAGE
COST LEADS TO PROFIT
Panel A shows profits to be the distance between the total revenue and total cost
curves, maximized at the output Q m = 4,000 cubic yards. Profits occur when the market
price is above average cost, as in panel B, so that the company is (on average) making a
profit on each unit it sells. Monopoly profits are the area ABCD, which is average profit
per unit times the number of units sold.
PRICE DISCRIMINATION
The basic objective of monopolists is to maximize profits, and they accomplish this
by setting marginal revenue equal to marginal cost, so price exceeds marginal cost.
Monopolists can also engage in a variety of other practices to increase their profits.
Among the most important is price discrimination: that is, charging different
prices to different customers or in different markets.
Figure 12.6 shows a monopolist setting marginal revenue equal to marginal cost
in the United States and in Japan. The demand curves in the two countries are different.
Therefore, though marginal costs are the same, the firm will charge different
prices for the same good in the two countries. (By contrast, in competitive
markets, price equals marginal cost, so that regardless of the shape of the demand
curve, price remains the same except for the different costs of delivering the good
to each market.) Because prices in the two countries differ, middleman firms will
enter the market, buying the product in the country with the low price and selling
it in the other country. A company may attempt to thwart the middlemen—as many
Japanese companies do—by, for instance, having distinct labels on the two products
and refusing to provide service or honor any guarantees outside the country in
which the good is originally delivered.
Within a country, a monopolist can also practice price discrimination if resale is
difficult and if it can distinguish between buyers with high and low elasticities of
demand. Because the retransmission of electricity is restricted, an electricity company
can make its charge for each kilowatt hour depend on how much electricity the
266 ∂ CHAPTER 12 MONOPOLY, MONOPOLISTIC COMPETITION, AND OLIGOPOLY