Page 172 - DECO405_MANAGERIAL_ECONOMICS

Unit 10: Imperfect Competition – Monopoly

Case 1: Equilibrium under Price Discrimination Notes

A monopolist firm sells a single product in two different markets either different elasticities of
demand. Resale among the customers is not possible. The firm has to decide how much total
output should be produced and how it should be distributed between sub-markets and what
prices should be charged in the two sub-markets. It is assumed that production takes place at the
same point.

Figure 10.6: Equilibrium of Monopolist under Price Discrimination

Figure 10.6 shows the equilibrium of a monopolist under the two sub-markets. It may be
observed that the monopolist faces a less elastic demand curve in sub-market 1 as compared to
2. The aggregate demand and MR curves are shown in part (c). Profits are maximised where MC
curve meets the MR curve from below, i.e., at point E. The total profits are represented by the
shaded area EFG lying between the MR and MC curves. The monopolist would produce Q units
of output. In order to know the distribution of Q in two sub-markets the equilibrium aggregate
MR is equated to MR and MR at points E and E respectively. The monopolist would sell
1 2 1 2
amount Q in sub-market 1 at a price P . He would sell amount Q at a price P in sub-market 2.
1 1 2 2
It should be noted that Q = Q +Q .
1 2
Case 2: Dumping

This is a special case when the firm is a monopolistic in the domestic market but faces perfect
competition in the world market. Figure 10.7 shows the equilibrium of such a firm. AR and
H
MR are the average and marginal revenue curves respectively which the firm faces in the home
H
market. AR or MR is horizontal straight line at the level of prices P , prevailing in the world
W W w
market. MC denotes the marginal cost curve. The aggregate MR curve is given by the curve
AFEG which is the lateral summation of MR and MR . The profits are maximised when aggregate
W H
MR=MC, i.e., at point E. The firm would sell total output Q. In the home market, the firm would
equate MR to the equilibrium MC. Thus, the firm would sell Q units in the domestic market at
H H
a price P which is higher than the international price P . The remaining amount (Q-Q ) would
H W H
be sold in the world market at price P . The area AFED denotes the total profits of this firm. The
W
producer is said to be 'dumping' in the world market since he is charging less price in the world
market than in the home market.

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