NAFTA Years Later

[Master Zen]

Monopolies are price-fixers rather than price-takers (or price-accepters, i dunno how you say it in english). The more you near perfect competition the less leeway you have in setting both price or production. In perfect competition theoretically you would not be able to set either.

[Kidlicious]

Originally posted by Master Zen
Monopolies are price-fixers rather than price-takers (or price-accepters, i dunno how you say it in english). The more you near perfect competition the less leeway you have in setting both price or production. In perfect competition theoretically you would not be able to set either.

Ok I know what you are saying now. The demand curves are different. So a monopoly firm can 'fix' a price higher than it would be able to 'take' if the market were competitive. However, they still produce atleast to the point where MR=MC. It's just that their MR curve is downward sloping instead of level as it would be in a perfectly competitive market.

[Master Zen]

Originally posted by Kidicious


Ok I know what you are saying now. The demand curves are different. So a monopoly firm can 'fix' a price higher than it would be able to 'take' if the market were competitive. However, they still produce atleast to the point where MR=MC. It's just that their MR curve is downward sloping instead of level as it would be in a perfectly competitive market.

I wish I could draw sticks on posts anyway here goes:

In a monopoly, according to neo-classical theory you have a downward sloping MR curve, except that its negative slope is lower (i.e. it is always below the demand curve). Thus, on the level of production Q, that line would intersect the MR curve and the demand curve above.

Thus, the firm has a choice of producing within that range, starting from the point in which price P intersects the MR curve (say, P1) and the point in which it intersects the demand curve above (say P2). Of course, they monopolist firm will not produce at P1, it will produce at P2 since there is where the equilibrium is and receives monopoly benefits. The monopoly benefits can be calculated by getting the area between the two prices (P1 and P2) and the Q level.

hope I made it clear... if not I'll try and make a very crude graph....

-MZ

[Kidlicious]

Check this graph out.

[Kidlicious]

And you can get a description here

The Digital Economist is a great website btw.

[Imran Siddiqui]

Plus, US Steel and Standard Oil, one century ago, didn't have to worry about public relations as much as firms do today...

Maybe not as much, but they still did. These companies were openly reviled, by just about everyone, but they still kept their monopolies because they'd prevent anyone from entering the market, either by threatening preditory pricing or doing it in certain instances.

you generate more/less revenue by modifying the price and keeping production constant, even in a monopoly.

Yep, by keeping supply down, they can charge a much higher price, which actually will produce greater revenue than what they lost by not increasing supply to match demand. Demand remains high and money is made off the lessened supply and resulting higher price.

[Master Zen]

Originally posted by Kidicious
And you can get a description here

The Digital Economist is a great website btw.

Yes, that was a much better explanation that what I wrote even though people make fun of us because of it, economics is so much easier to explain graphically.

And a very good website, I hadn't seen it before but I'll be checking it for reference VERY often, thanks

-MZ

[Kidlicious]

Tomorrow I'm going to look at some of those Frontline and Nova website links on current events. They look very interesting.

[Master Zen]

Originally posted by Imran Siddiqui

Maybe not as much, but they still did. These companies were openly reviled, by just about everyone, but they still kept their monopolies because they'd prevent anyone from entering the market, either by threatening preditory pricing or doing it in certain instances.

Don't get me wrong, I agree with the predatory pricing, I just think it is not much common practice today as it was before, also those companies (i.e. giant heavy industrial companies) have less direct touch with individual consumers than say, Fruit of the Loom which means they can pretty much afford predatory pricing wheras the average individual-consumer-based firm can't. Those firms are actually more close to being intermediate supplies rather than producers of finished goods. Most of us don't go and buy steel ingots or crude oil. We buy products derived from those products.

[Imran Siddiqui]

Very true, and I agree. Yet it still can happen. In consumer goods, like electronics, prices can change a lot over a period of time by increasing or decreasing prices of 'new' products (ie, higher or lower price for a new style DVD... higher or lower than what it should be in order to manipulate the market as a monopolist).

[Master Zen]

I know what you're getting at, just that I think you're confusing the effect of monopoly with the effect of price discrimination which is something even non-monopolies do. The reason new hi-tech gadets are more expensive is because of 2 things:

1) the effect of scale economies which comes with greater production (i.e. as more people start buying DVDs, production of DVDs increases and the scale effect starts dropping the marginal cost of each unit.)

2) the effect of price discrimination. Basically this means that despite the scale effect the DVD producer will charge a higher price (no matter if he is or isn't a monopolist) to get more out of the consumer excedent. What this means is that across the demand curve you have people who increasingly demand the same product at lower prices. At level Q=1 you'd have the highest price for a DVD because that person would be the extremely rich tech geek who will pay $10,000 for the very first DVD on the market. Each subsecuent person will demand a DVD but at a lower price. i.e. the max price each one of us is willing to pay for a DVD is in essense the demand curve. If I am willing to pay $200 for one, and the average cost is $100, then that $100 I did NOT pay is my consumer excedent. So, what companies do when a new product comes out (and this especially happens with electronics and computer products) is that they will hike up the price at launch so they can get the rich techies to buy their stuff at a higher price (and here individual behavoir comes in as being the first to buy a DVD on the block carries status symbol utility). Since everyone EVENTUALLY is going to buy a DVD, why not charge a ****load for the first months? Companies get a lot more revenue doing that, then slowly lowering the price to get more people to buy it.

-MZ

(btw, hope the post was actually understandable... you'll probably find a better explination at Kidicious' link)

[Imran Siddiqui]

No, no... I know the effects of price discrimination. You misunderstand me. What I'm talking about is that a monopolist might raise (or lower) the price even MORE than the price discriminatory price in order to get competitors out of the market (ie, lower price discriminatory prices when a new technology comes out, and then when the competitor is gone, then higher price discriminatory prices for the next thing).

[Master Zen]

Originally posted by Imran Siddiqui
No, no... I know the effects of price discrimination. You misunderstand me. What I'm talking about is that a monopolist might raise (or lower) the price even MORE than the price discriminatory price in order to get competitors out of the market (ie, lower price discriminatory prices when a new technology comes out, and then when the competitor is gone, then higher price discriminatory prices for the next thing).

Ok, you are talking about predatory pricing, but as I said, I don't think the effect is so great for consumer-based firms if they flirt with the prices TOO obviously. But yes, it is a possibility and I'm sure they do it to some degree or another, hell, I'm sure there's pretty much nothing they DON'T do...

-MZ

[Imran Siddiqui]

Very true. I mean, they are probably very sneaky in where they are preditory pricing. But, we have to remember that it still goes on, even if there is more consumer pressure on them.

[Master Zen]

Originally posted by Imran Siddiqui


Very true. I mean, they are probably very sneaky in where they are preditory pricing. But, we have to remember that it still goes on, even if there is more consumer pressure on them.

Too bad economists, as long as they are not CEOs will never find out just how sneaky...