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Classifying customers[ edit ] Successful price discrimination requires that companies separate consumers according to their willingness to buy. Determining a customer's willingness to buy a good is difficult. Asking consumers directly is fruitless: The two main methods for determining willingness to buy are observation of personal characteristics and consumer actions.
As noted information about where a person lives postal codeshow the person dresses, what kind of car he or she drives, occupation, and income and spending patterns can be helpful in classifying. The natural priceor the price of free competitionon the contrary, is the lowest which can be taken, not upon every occasion indeed, but for any considerable time together.
The one is upon every occasion the highest which can be squeezed out of the buyers, or which it is supposed they will consent to give; the other is the lowest which the sellers can commonly afford to take, and at the same time continue their business.
Monopoly, besides, is a great enemy to good management. Because the monopolist ultimately forgoes transactions with consumers who value the product or service more than its price, monopoly pricing creates a deadweight loss referring to potential gains that went neither to the monopolist nor to consumers.
Given the presence of this deadweight loss, the combined surplus or wealth for the monopolist and Answers to microeconomics 7th edition robert s pindyck is necessarily less than the total surplus obtained by consumers by perfect competition.
Where efficiency is defined by the total gains from trade, the monopoly setting is less efficient than perfect competition.
Sometimes this very loss of psychological efficiency can increase a potential competitor's value enough to overcome market entry barriers, or provide incentive for research and investment into new alternatives. The theory of contestable markets argues that in some circumstances private monopolies are forced to behave as if there were competition because of the risk of losing their monopoly to new entrants.
This is likely to happen when a market's barriers to entry are low. It might also be because of the availability in the longer term of substitutes in other markets.
For example, a canal monopoly, while worth a great deal during the late 18th century United Kingdomwas worth much less during the late 19th century because of the introduction of railways as a substitute.
Natural monopoly A natural monopoly is an organization that experiences increasing returns to scale over the relevant range of output and relatively high fixed costs. The relevant range of product demand is where the average cost curve is below the demand curve.
An early market entrant that takes advantage of the cost structure and can expand rapidly can exclude smaller companies from entering and can drive or buy out other companies.
A natural monopoly suffers from the same inefficiencies as any other monopoly. Left to its own devices, a profit-seeking natural monopoly will produce where marginal revenue equals marginal costs. Regulation of natural monopolies is problematic.
The most frequently used methods dealing with natural monopolies are government regulations and public ownership. Government regulation generally consists of regulatory commissions charged with the principal duty of setting prices.
By average cost pricing, the price and quantity are determined by the intersection of the average cost curve and the demand curve. Average-cost pricing is not perfect.
Regulators must estimate average costs. Companies have a reduced incentive to lower costs. Regulation of this type has not been limited to natural monopolies. By setting price equal to the intersection of the demand curve and the average total cost curve, the firm's output is allocatively inefficient as the price is less than the marginal cost which is the output quantity for a perfectly competitive and allocatively efficient market.
Government-granted monopoly A government-granted monopoly also called a " de jure monopoly" is a form of coercive monopolyin which a government grants exclusive privilege to a private individual or company to be the sole provider of a commodity. Monopoly may be granted explicitly, as when potential competitors are excluded from the market by a specific lawor implicitly, such as when the requirements of an administrative regulation can only be fulfilled by a single market player, or through some other legal or procedural mechanism, such as patentstrademarksand copyright .
Monopolist shutdown rule[ edit ] A monopolist should shut down when price is less than average variable cost for every output level  — in other words where the demand curve is entirely below the average variable cost curve.
Please help improve this section by adding citations to reliable sources. Unsourced material may be challenged and removed. June Main article: Competition law In a free market, monopolies can be ended at any time by new competition, breakaway businesses, or consumers seeking alternatives.
In a highly regulated market environment a government will often either regulate the monopoly, convert it into a publicly owned monopoly environment, or forcibly fragment it see Antitrust law and trust busting.
Public utilitiesoften being naturally efficient with only one operator and therefore less susceptible to efficient breakup, are often strongly regulated or publicly owned. Standard Oil never achieved monopoly status, a consequence of existing in a market open to competition for the duration of its existence.
You may improve this articlediscuss the issue on the talk pageor create a new articleas appropriate. September Main article: Competition law does not make merely having a monopoly illegal, but rather abusing the power a monopoly may confer, for instance through exclusionary practices i.Find great deals on eBay for microeconomics robert pindyck.
Shop with confidence. by Robert Pindyck, by Daniel Rubinfeld Microeconomics (7th Edition)(text only)7th (Seventh) edition[Hardcover] by by Robert Pindyck, by Daniel Rubinfeld.
The primary focus of this text is to empower management students with statistical decision-making skills so that they become active participants rather than passive observers in business situations in which statistical findings are reported and discussed as part of a management decision-making process.
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