Allocative efficiency exists because Pc=MR =MC at Qc, and productive efficiency exists
because firms produce at minimum ATC, once entry or exit has occurred in the long term.
On the other hand, the monopolist produces at a quantity Qmwhere Pm>MR =MC.
This result tells us that consumers would like to consume more of the product; but the
monopolist does not produce as much as consumers want. Failing to achieve allocative
efficiency creates the deadweight loss (DWL) shown in Figure 9.13. The monopoly output
is not at the point where ATC is minimized; thus the monopolist is not productively effi-
cient. A profit earned by the monopolist is a transfer of consumer surplus from consumers
to the firm.Market Structures, Perfect Competition, Monopoly, and Things Between ‹ 131- Qm<Qc
- Pm>Pc
- Pm>MC so monopoly is not allocatively efficient.
- Deadweight loss exists with monopoly.
- Pm>minimum ATC so monopoly is not productively efficient.
- Pm>0 is a transfer of lost consumer surplus from consumers to the firm.
Price Discrimination
Though the name implies a nasty stereotype, price discriminationis the selling of the same
good at different prices to different consumers. Successful price discrimination is possible
if three conditions exist:- The firm has monopoly pricing power.
- The firm is able to identify and separate groups of consumers.
- The firm is able to prevent resale between consumers.
Common examples of price discrimination include the following:- Child and senior discounts at the movie theater or restaurants
- Airline tickets that are bought three weeks in advance compared to tickets bought one
hour in advance - Coupons that separate price-sensitive consumers (those who use the coupon) from those
who are less price sensitive - A lower per unit price paid by consumers who buy items in large quantities (like a case
of soda) than those paid by consumers who buy in lesser quantities (like a six-pack of
soda, or one can from a vending machine)
The airline industry is clearly not perfectly competitive, so there must be a degree of
monopoly pricing power. The firm creates groupings based upon when consumers purchase
tickets. The photo identification requirement for all passengers is an important security
measure, but it also prevents the resale of a low-priced ticket to a consumer who is willing
to pay a higher price. If resale were possible, the pricing system might break down. It should
not surprise you that price discrimination allows firms to earn more profit than if they
charged a single price.
TIP