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E312. Lecture 9

22 September 2005

Assignments

Problem Set #4 (Handout: Due Tuesday)

Review

E. Monopoly Pricing

1. Assumptions

a. A single producer, protected from entry

b. Many buyers

c. No price discrimination

2. Analysis

a. The firm is the market.

b. Marginal Revenue,

c. Determination of an Optimum.

d. Observations

i. The Monopolist relative to a competitive outcome

ii. Monopolists need not make money

Preview

iii. Calculating the Monopoly Outcome with Constant marginal costs

iv. Price Discrimination

v. The persistence of monopoly power.

LECTURE______________________________________________________________

Commentary: In the world of E-Commerce. Two developments.

1) The flamboyant Larry Ellison, CEO of Oracle made an offer for $5.8 billion for Siebel Systems. It also purchased G-Log, a producer of logistics and transportation management software. The company has been on a buying spree lately with recent purchases including

Oblix focussing on the identity management technology,

Retek (retail management software),

TripleHop (enterprise search products),

TimesTen (real time data management),

Profit Logic (retail),

Context Media (enterprise content integration software),

i-flex (banking)

Siebel in the customer relationship management space.

The ambition of Oracle is to overtake SAP as the leading provider of SAP software

2) E-Bay purchased Skype for $2.6 Billion (if certain incentives are met, the price could rise to $4.1 Billion). This is an immense price for a small concern with revenues of only $60 million and that has yet to earn a profit. However, there was competition from Microsoft, Yahoo and Google. E-Bay says that the new technology will allow buyers and sellers to communicate verbally. The economist suggests that Skype is such a hot commodity because it will change the billion dollar telephony market.

a. In a few years international telephone service will be like email, essentially free.

b. Some predictions about market adaptation. Current players are lining up in two camps. Those embracing the change (typically those companies who have invested heavily in networks that the new technology will use anyway) and those who will do all they can to ignore or undermine the change (these are companies that are heavily invested in long client lists of subscribers

LECTURE_______________________________________________________

Constant Cost Monpolists.

iii. Sometimes it will be useful to consider monopolists with constant unit costs MC=AVC. As shown by the panel on the left below, profit and price predictions are particularly easy to generate in this case.

iv. Price discrimination. Price discrimination both increases monopoly profits, and reduces the social costs of monopoly. With 1st degree price discrimination, for example, the MR and AR for the monopolist would no longer differ. (See above right)

v. Absent government impediments, monopolists rarely “corner” markets for very long. This is particularly true of benefits from the “learning curve.” This is our next example.

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