Transcription
How's it class? So today, we're going to be covering chapter 24. Chapter 24 has to do with monopolies. Um, and actually, uh, before we go over this definition, I want you to remember that, um, we're covering right now the extreme ends of the, uh, market structure spectrums. So, what we just finished was perfect competition on one side, and now we're going to the other extreme, which is monopoly. And of course, like I mentioned before, in between, we have a couple of others where we have closer to perfect competition is monopolistic competition, and then closer to monopoly, we have oligopoly. So, right now, uh, we covered perfect competition, check. And so now we're going to monopoly, and then we're going to compare and contrast the different market structures. And then we're also going to see the variations in between as we go into monopolistic competition and some overlap. But then we're going to be focusing on other things, uh, when we get to oligopoly. But like I mentioned before, uh, uh, we'll get to that later.
So, then the definition then of a monopolist is a single supplier of a good or service where for which there is no close substitute, and the monopolist therefore constitutes the entire industry. So, if you recall, when we looked at perfect competition on the left side, we had two diagrams. And on the left side, we had the industry representation, and that's where we saw the actual industry supply curve and the industry demand curve, and that's where we saw price established in a perfectly competitive marketplace. So, that price was taken over, and it was taken to the firm's perspective, and it became the demand curve as well as the marginal revenue curve. Right now, um, in this case, now we're not going to be having to break down the firm's perspective because the firm is, for a monopolist, they see the industry. So, their supply curve is the industry supply curve, and the demand curve, they see the demand curve as it is, where they saw different price quantity combinations possible based on whatever the independent variable price was. Whereas on the right side, for perfect competition, they didn't get to see the industry demand curve. They saw only what was available to them, which was a horizontal demand curve because they didn't have any control over price quantity combinations.
So, for this monopolist that constitutes the entire industry, they have, uh, barriers to entry into the monopoly industry. The source of monopoly power, therefore, is the barriers to entry, which are restrictions on on who can start and stay in business. Now, essentially, the three reasons: ownership of resources without close substitutes. So, therefore, you have all the power, you have the product, and nobody else can sell it. Um, number two, economies of scale. That's a situation, for example, if you have all the benefits based on the size of your operation, and therefore, you are too hard to compete with on cost by other potential competitors. Therefore, you have the monopoly, and it's based on these economies of scale, and that's called a natural monopoly. So, economies of scale, uh, that creates a monopoly is based on a natural monopoly. And then the third source of monopoly power is legal or government restrictions, which, for whatever reason, the government may deem that one company will be the sole provider of, uh, of a good or service. And it might be that there's no room, uh, in the marketplace for others, or it would yield higher costs if they, for the consumer, if they allow competition based on things like, uh, the cost structure for a firm entering it, or other reasons such as intellectual property, uh, protection, and so forth.
Okay, so when it comes to ownership and control of resources without close substitutes, one of the examples is the Alcoa, or the Aluminum Company of America. At one time, they owned most of the world's bauxite, which was, uh, essentially your aluminum. And then same with nickel. Uh, but also stadium pro teams is another situation that creates a barrier to entry, uh, because a pro team needs a stadium, and essentially, not many stadiums out there. There's not many close substitutes for, for a professional stadium, uh, so it creates a situation of a barrier to entry, uh, for pro teams.
And then there's economies of scale. Economies of scale is a situation where there's low unit or variable costs and prices that will drive out rivals. The largest firm can produce at the lowest average total cost. Now, even though this isn't the situation of Walmart, Walmart is a is a situation where they tend to have lower average total costs, so it'd be really hard for a smaller company that doesn't have that lower cost structure that they can take advantage of, for them to compete against a monopoly. Uh, and for economies of scale, then there's only room for one firm in the marketplace. And natural monopolies in this situation would be natural gas and electric companies. Um, and so this would occur in markets where fixed costs are large relative to variable costs. And, uh, for example, like producing electricity, there's a lot of investment in machinery, equipment, wires, cables, etc. These fixed costs.
And then another one would be, uh, legal or governmental restrictions. So, this is where licenses or public franchises are granted. Also, patents or copyrights would be a way of having a legal or government restriction. Uh, and of course, uh, some examples are like we mentioned earlier, electrical utilities, or radio and broadcasting, or television.
So, why might the government regulate, for example, electrical utilities? Maybe it might be a situation where the marketplace, uh, is not big enough. If you think about electric, uh, utility companies, they tend to have, uh, a lot of infrastructure, right? So that's a very high fixed cost. So if you look at the average, oops, let's go back a second. So if you look at the average, if you look at the average total cost, uh, because of the fixed cost aspect, there's such a high cost structure. Let's do an exaggerated example here, and you look at, uh, on the number of consumers on the horizontal axis. Let's just say there's a total number of consumers of 100. Now, if they, if it wasn't regulated and they allowed free entry, or freer entry into the marketplace for providing electricity, let's just say that this is looking at current HECO customers, okay? And this is the Hawaiian Electric Company average total cost curve. So, we're looking at the cost per unit, uh, for providing electricity. Now, if another competitor comes in, even if they're successful in just taking a small portion of the customers from HECO, so it goes down from 100, so basically now HECO will be having a higher cost per unit that it takes for them to deliver electricity to customers. And of course, as more market share is taken from HECO, the quantity based on this, it's like it's going to be a higher and higher cost per unit, which raises the cost to the consumers by this situation here, caused by competition in the marketplace. So, this elevated cost might be a justification for limiting the amount of utility companies in the marketplace, for example. But of course, with it has to come some other, uh, regulations and, uh, checks and balances for the government relative to this profit-seeking institution of an electric utility company. Therefore, if they want to raise rates and so forth, they're going to have to run it by the PUC, which is the Public Utilities Commission, and say, "This is our cost, this is what we project in revenues and so forth, and we're going to run short, so we're requesting to be legally allowed to increase costs to customers." And then, if the PUC deems it so, then they'll allow them to raise costs. But there's there's a balance there, and we hope that they're doing a good job in terms of keeping our costs as well as possible for the consumer.
Okay, so, uh, like we mentioned, the demand curve a monopolist faces is going to be the industry demand curve. And again, in perfect competition, it's a perfectly elastic demand curve. It's not the real demand curve for the industry, but it's what a firm sees and in terms of what a firm deals with because of the the size of the industry and their firm relative to the industry. Uh, and so in perfect competition, the second point is the firm is a price taker, and supply and demand establish the price per unit. Uh, so in perfect competition versus a monopoly, in red, it says perfect competition, so we're talking about the perfect competitor, and it can sell its entire output, whatever that may be, at the same price. So, therefore, that's why we determine that there's no low price lower than what the horizontal demand marginal revenue price curve is for the perfect competitor. And if you're not sure what I'm saying, it's a here we have that demand curve, but it's also the marginal revenue curve, it's also the price, okay, that horizontal demand curve. So, it can, it looks this way horizontal because the firm can sell its entire output, it doesn't have to lower the price. Whereas for a perfect competition versus monopoly, the monopoly sees the demand curve as it is because they are the size to actually experience what it is. Uh, they're the only provider, and the monopolist, therefore, needs to lower the price to sell more units because of the downward sloping demand curve. So, again, looking at it this way here, we have a downward sloping demand curve. So, there's a price quantity combination here. If they want to sell more quantity over here, then based on what the demand curve is, they have to lower the price. But because up here, in a perfect competition scenario, the firm is so small relative to the industry, they have no control. All they got to do is increase the quantity, and they'll sell it at the given price based on the demand.
So, again, perfect competition on the left, pure monopoly on the right. So, here's the basics if H breaks down monopoly versus perfect competition. So, just looking at the first column, monopoly is a single seller. They face the entire industry demand curve. They must lower their price to sell more, and not all units sold for the same price. And that's, uh, one thing to note is that the marginal revenue is always going to be less than the price. The marginal revenue is always going to be less than the price. So, actually, what you're looking at here, in the difference, is here we saw demand is equal to marginal revenue, equal to price, that horizontal. Whereas over here, we have a demand curve, and now we're going to have a marginal revenue curve that falls below it. So, it won't be that equal situation here where it's the same line. Now, we're going to have two curves, demand and marginal revenue.
So, let's take a couple of minutes to discuss why is the marginal revenue curve below the demand curve for the monopolist. So, first, recall that marginal revenue is going to equal to the change in total revenue with respect to the change in quantity. And then that total revenue is going to equal to price times quantity. So, let's, uh, while it will not be very clean looking, uh, based on, uh, the freehand drawing here, let's create a diagram. And I'm using on the vertical axis a price of 8 down to 1, and then the quantity of 1 up to 7 or 8. But let's just say seven, I guess, good enough. And, uh, we'll create the demand schedule until here's our demand schedule where we have price 8, 7, 6, 5, 4, 3, 2, 1, and the quantity that one all the way up to 8. So, there's that negative or inverse relationship. As, uh, one goes down, the other goes up, or vice versa. And so we can plot those points. So, here we have 8 and 1 right there. Then we have 7 and 2, and 6 and 3, 5 and 4, and so forth and so on. Once we plot that, and then we connect the dots, and then we got our downward sloping demand curve. And so now, going back to this situation here, we're trying to look at the marginal revenue curve, and we're going to ask, or we're trying to figure out why it falls below the demand curve based on what we see here, change in total revenue with respect to change in quantity. We're given what total revenue is here, so it's going to be price times quantity. So, we're going to add a total revenue column right here. We can get it from our price times quantity here. And so, filling it in, 8 times 1 is 8, 7 times 2 is 14, 6 times 3 is 18, and so forth and so on. We got 20, 5 times 4, 4 times 5, and so forth and so on.
So, next, we want the marginal revenue, which is the change in total revenue with respect to the change in quantity. And again, this is going from our, rather, sorry, the change in quantity, 1 to 2, 2 to 3, 3 to 4. So, in a sense, these marginals are going to be in between. So, here we're going from 1 to 2, so going from 8 to 14, we have our marginal revenue equal to 6. So, here we said going from 1 to 2, we had a marginal revenue equal to 6. So, I'm going to choose that marginal concept of in between, and it's going to be here, up at 6. And then going from 2 to 3, I'm going to keep the ink here. 2 to 3, we're going to have a marginal revenue equal to 4. And then from, uh, 3 to 4, we're going to have a marginal revenue equal to 2. And then 4 to 5, we have a marginal revenue equal to 0. 5 to 6, we're going to have a marginal revenue, now we're going backwards, we're going minus 2, and then minus 4. Okay, so now we're just going to go ahead and finish plotting these. We did this first one, then we're going to do the rest. So, here we have going from 2 to 3, that's going to equal to 4, right about there. Then 3 to 4, we're going to be at 2, right there. And then 4 to 5 is where we get the zero, so we're actually going to be here. And then 6 to 7, we saw minus 2, so that'll be somewhere down here. So, now what I'm just going to do, and of course, it's very imperfect because of my grid here, but here we have our marginal revenue curve. Oops, there's our marginal revenue curve. So, basically, from now on, we have this demand and our marginal revenue curve that falls below it like that. Okay, so I hope that makes sense, uh, how we went ahead and took our price quantity combinations, got total revenue, then got our marginal revenue, and then plotted it relative to our demand curve to see that situation.
So, taking a look at the marginal revenue situation here, where we have the demand curve, what we're looking at, the change in total revenue. This is how we would go, uh, looking from one price, P1, going down to P2. What we saw was a loss of a certain amount, but then we also saw a gain. So, here we see the gain, larger rectangle relative to the loss. So, that's a situation where we still be on the positive, the change in total revenue, or the marginal revenue, the change will be greater, uh, because of the gain relative to the smaller loss.
So, when it comes to elasticity and monopoly and this downward sloping demand curve, elasticity again is the the the relative extreme amount of that, uh, demand curve slope. The downward slope demand curve, uh, tells us that a monopoly cannot charge just any price with no changes in quantity, which is a common misconception. We kind of, a lot of people, if you talk about like utilities or so forth, and they're complaining about the high electricity costs or whatever, it's because they feel that, well, you know, because they're the only industry in the marketplace, that all they got to do is just raise the price and we're going to have to pay it. But that's a common misconception. As price changes, because of the downward sloping demand curve, a different quantity will be demanded.
So, looking at the difference in decision-making process, a perfect competitor, not a monopolist, but the perfect competitor decides on the profit-maximizing quantity only. Quantity. So, therefore, the perfect competitor is a price taker because they don't choose the price. They just say, "Well, this is the price," and given the price, based on my cost structure, this is where I maximize profits. They're price takers. Whereas a pure monopolist, they're going to seek the profit-maximizing price and quantity combination because they see the demand curve as it is, downward sloping. They have different options of the price quantity combinations that they could choose to produce at. So, they must find the profit-maximizing solution based on different prices and quantities. Perfect competitor, they were given the price and they just had to decide the quantity. Now, monopolist, they got to decide based on price and quantity. So, being a price searcher, a price searcher determines the price quantity combination for max profit due to a downward sloping demand curve.
So, for the monopoly profit maximization, two approaches are possible to get to the same results. One is looking at profit maximization using the total revenue and total cost approach. That's where you're going to maximize the positive difference between total revenue and total cost. Or we can do, which is the more common in economics, looking at the marginal approach because you get the same answer, but it's, uh, it really focuses on the methods that economists use in terms of incremental marginal decision-making process. And of course, it's where marginal revenue equals marginal cost. Now, this is an important outcome in economics, whether it be in market structures, whether it be in natural resources, environmental economics, where things are a little harder to, uh, determine by the marketplace, but we still need to try to look at prices, for example, to reveal, uh, preferences and priorities for us. So, while we may not be looking at marginal revenue equals marginal cost as the optimization solution, it still is the same method. Sometimes, though, we call it marginal benefit equals to marginal cost. For a profit-seeking institution like a firm, the benefit that they're seeking is higher revenue. So, that's what they're looking for. That's why we specify it as marginal revenue. But in another situation where it might not be revenue, such as a public good or something like, uh, uh, environmental good, uh, for example, something that's not traded on the market in the marketplace, so prices are hard to determine. We're still going to be looking at the situation, the marginal optimization solution, but instead of marginal revenue, we might call it marginal benefit. And so, marginal benefit equals to marginal cost. But we're focusing on marginal revenue equals to marginal cost. But I guess my point is, in economics, no matter what level you advance to, understanding these, these are the results you're seeking, where your marginals are equal, your benefit to the cost. For a firm, it happens to be revenue. This will get you your first step toward the solution in many, many, many economic situations, regardless of the level, of course. But anyway, the look of the total revenue relative to the marginal approach, we saw these graphs in our earlier chapter coverage, but this is just a reminder. On the first one, the total approach, we're looking to maximize that vertical distance there. But for the marginal approach, we're always looking at where marginal revenue equals to marginal cost. And again, I can't stress enough at how important that is. Is that when you have a lot of things you need to consider in these chapters now, and you're trying to come up with the various solutions that you're trying to optimize, in really what you're looking for, your first step is to determine where your marginal revenue equals marginal cost. Because when you're looking at a diagram like this, sometimes it can be confusing, where do I start? Well, the first thing is marginal revenue equals marginal cost, right there, and that gives you your profit-maximizing quantity, and you go from there.
So, looking at, uh, demand and marginal revenue cost curve, this is, uh, to help you try to answer questions sometimes when you're given information which may not be nicely summarized in a completed graph, but maybe are given a conceptual question in words, but not diagrams. But this is to highlight an issue, such as what I'm trying to get to right here. So, now we have our marginal cost, demand curve, and marginal revenue curve. Now, like you guys should know, is that marginal revenue equals marginal cost is your optimization solution. But what happens when you're not there? What is the situation, and how do you determine what you do to optimize your situation? So, okay, let's look at a situation where we are not at our profit-maximizing solution of marginal revenue equals marginal cost intersection. And choose a situation like Q1, where we have point A and point B, that disparity between marginal revenue and marginal cost. And what you see here is, based on the cost curves and how they're situated, you can see that marginal revenue is greater than marginal cost. Now, it might be tempting to say this is the best solution to be in. In fact, it might be tempting to say that the greater that marginal revenue is and marginal cost, the better. But no, you're thinking in terms of total. Total is the situation where you want to maximize the difference between the two, revenue and cost. But when it comes to the marginals, you want it where it's equal to each other, and that's not the situation at Q1. The situation at Q1 is here. So, how do you change your activities to get to the profit-maximizing solution? Well, if your profit-maximizing solution is where they're equal to, then that's going to be here. And if you're at Q1, you're going to want to increase the quantity to get to your profit-maximizing solution here. So, again, if a question is asking you, "What should you do?" and they tell you that your marginal revenue is 100 and your marginal cost is 50, what should a profit-maximizing monopolist do in this situation? Your answer should be to increase quantity. Increase quantity, because what you're trying to do is capture all the benefits where the additional revenue is going to be greater than the additional cost. So, what you're by at Q1, you're giving up this area of additional profits, the additional revenue greater than the additional cost that you're incurring. You're also giving up this area to the right of that, and then this area to the right. So, essentially, you want to capture this entire area, otherwise, that's money left on the table that you could have increased your profits. And you might say, "Well, that little incremental triangle is very little, it's not worth my time." Actually, remember in economics, your cost functions will capture your implicit cost. So, it is worth your time because if there's a disparity where your marginal revenue is greater than, it's already counting your opportunity cost. And if it is, then you should, even if it's a penny, that penny is worth capturing because it's no longer, you can't say it's not worth my time anymore because you're implying a cost is greater. But no, based on the functions, if your marginal revenue is greater than your marginal cost, even if it's a penny, you want to capture that extra penny. It's worth it.
And then likewise, there's another solution, Q2, on the right, where we have point C and point F. And in that situation, you can see, based on the cost curve, this time your marginal cost is greater than your marginal revenue. So, if the question comes up, says your marginal cost is 100 and your marginal revenue is 50, what should a profit-maximizing monopolist do? And the answer should be to reduce quantity, because ultimately, you're trying to get to this intersection where marginal revenue equals to marginal cost. Now, the kicker to all this is, now that we do determine how we end up at our profit-maximizing solution, that's to adjust quantity to make sure we get to that intersection. Once we get to that intersection, what's different based on relative to our perfectly competitive marketplace again? Well, we don't charge the price for our good where that intersection is. We figured out the quantity based on where our marginal revenue equals marginal cost. So, on the horizontal axis, we have that profit-maximizing quantity. And based on that quantity, we're going to charge the price that consumers are willing to pay, and that's going to be based on the demand curve. So, once we have our marginal revenue equals marginal cost, that tells us our profit-maximizing quantity. And based on this quantity and what the demand curve tells us consumers are willing to pay, that's what we're going to charge. So, get this, and then get this.
So, now to determine the types of profits that we're getting, all we need to know is where our cost curves are. So, here's a situation where we have a monopoly profit being earned, and that's shown by here. We have marginal revenue and marginal cost. So, again, we get that dot here, that I squared, that gives us our profit-maximizing quantity. From that, we go up to the price we charge up here, and so that gives us there, that price that we're charging. And looking at the cost per unit, the cost per unit is this dot right here, based on, well, that curve here, which is our average total cost. Oh, here it shows our average total cost curve. So, our cost per unit, that red dot that I just drew, the revenue that we receive per unit, this vertical distance is our price per, our profit per unit. When we multiply that vertical distance by the quantity, or the horizontal, the base times height, then we have this rectangle with which represents our total monopoly profit.
And then again, um, monopolies are not necessarily always profitable, depending again on the cost structure and so forth, and the demand curve. But here's a situation where, again, let's go through the process. We have marginal revenue equal marginal cost. Always look for that solution. Instead of looking at these massive curves and being confused, always look for your marginal cost is equal to marginal revenue, and that's going to be here, which gives us our profit-maximizing quantity there. That's the next step. And then from there, we can determine the price that we're going to charge, and that comes from the demand curve, that gives us PM. And then we also need to look at our cost per unit. We look at using our average total cost, that here, that goes there. So, since our costs are above our revenues, we're making a loss per unit. And to figure out our total losses, we multiply the loss per unit, that vertical distance, times the horizontal distance, which is the quantity, and it gives us our rectangle of total losses. So, hopefully, that makes sense in terms of how we're approaching this situation.
Now, there's inefficiencies associated with monopolies. And comparing monopoly with perfect competition, one of the things, this is one of the rules, the the the general outcomes that you should be aware of and look for the questions that pretty much are uniform in in terms of how you answer those using these ideas, is that the monopolist produces a smaller quantity and sells at a higher price. The monopolist raises the price and restricts production compared to a perfectly competitive situation, and the consumer, therefore, pays a price that exceeds the marginal cost of production, and resources are misallocated in such a situation. So, let's use this set of diagrams to highlight that idea. Let's just say that the left side here represents the perfectly competitive marketplace. So, let's say that represents a perfectly competitive marketplace. We let supply equals demand, and it sets the price, and it gives us the equilibrium quantity. Now, let's just say it changes to a monopoly situation where no longer does the demand equals to the marginal revenue curve. Now, we have a situation where the demand curve is not equal to the marginal revenue curve. So, therefore, we have our marginal cost equals to marginal revenue here, instead of here. So, now, based on what could have been, we'll say QAR, which is the equivalent of this one here, now we have a smaller quantity, and instead of the price here, it went up based on what happened here. So, we have a smaller quantity and higher price. So, then that goes back to that bottom point there. Consumers pay a price PR that exceeds the marginal cost of production, and resources are misallocated. Um, and here it says, uh, in the second point, monopolists actually, that's probably the one I really want to look at. Monopolists raise the price and restrict production. That's a higher price, lower quantity.
Now, it's possible to make even higher profits, uh, using the concept of price discrimination. That's when you're selling a given product at more than one price, with the difference being unrelated to differences in the marginal costs. So, one way that you might have seen price discrimination is, uh, uh, pricing for airline tickets. You can see situations for, uh, business class travelers versus, uh, vacationers. They will pay different prices based on their position on the, their relative position on the demand curve. So, what happened is, is in price discrimination, we have a downward sloping demand curve. Now, instead of a price being established like this, and the price being set based on supply equals demand, here they're going to have a sliding scale of prices where they can charge a higher price for those on the demand curve that are willing to pay a higher amount, then for those like the lower, the lower price for those who aren't willing to pay as high a price. And so they're able to, uh, get this amount versus this amount. And then those like our, our, uh, what do you call it, coach travelers on airplanes, maybe that's us, we'll pay a lower price. And thereby, all these different prices that they, that if they let it just sit at P star, they'd be missing out on this, this, this, and this, all these people on the demand curve who are willing to pay higher amounts. Now, if they can price discriminate, they're able to capture that.
The concept of price differentiation is establishing different prices for similar products to reflect differences in marginal cost in providing those commodities to different groups of buyers. Uh, kind of what we're talking about earlier with, uh, how to capture the vertical distance, this situation here, this situation here, this situation here, and all this area right here. This goes to a concept called consumer surplus. Taking a look at, given the market clearing price that prevails in a perfectly competitive marketplace, consumer surplus is the difference between the total amount that consumers would have been willing to pay and the total amount that they actually pay. So, again, going to here, that shaded area is the total amount of consumer surplus. Now, the greater the amount that consumer surplus experienced, from a bird's eye perspective, just in terms of the functioning of an economy, and is it functioning well? If it's maximizing consumer surplus, then it is functioning well. Then, in that case, then the economy is operating very efficiently. The more it maximizes the consumer surplus. But there are a lot of situations like taxes, for example, which skew the outcome in a supply and demand situation. It takes us away from the equilibrium of supply and demand. And also this monopolist situation, where the marginal revenue equals marginal cost situation also cuts through this. It creates a situation of what we call deadweight loss. The deadweight loss is the portion of consumer surplus that no one in society is able to obtain. In a situation of a monopoly, no one in society, not even the monopoly, can obtain this deadweight loss. So, let's draw a situation here that might reflect where we might see deadweight loss. So, here we have our demand curve. So, I'm adding a marginal revenue curve. So, our marginal revenue equals marginal cost. Well, we're going to use this as marginal cost here, okay? So, we know then that marginal revenue equals to marginal cost sets the profit-maximizing quantity that a monopolist will produce at. And then we know then that they're going to charge a price up here. So, what happens now is that this area becomes that deadweight loss. Now, deadweight loss is transactions gone because of this situation of price quantity combination. See, there would have been a, if it wasn't a restricted quantity based on this situation here, then this transaction would have taken place. That per individual on the demand curve, let's just say there's an individual on the demand curve here that receives additional consumer surplus relative to the price they paid, as well as this person on the demand curve here that received this consumer surplus relative. And so forth and so on. Now, with this price quantity combination here, all these transactions are gone, and that's a benefit lost. That consumer surplus gone is a benefit loss to society. No one captures it. So, that's an inefficiency created by this type of market structure. So, again, no one can take advantage of that area. No one can recover that, not even the monopoly. As a result of monopoly, consumers are worse off in two ways. The monopoly profits that result constitute a transfer of a portion of consumer surplus away from consumers to the monopolist. And then the failure of the monopoly to produce as many units as would have been produced under perfect competition eliminates consumer surplus that otherwise would have been a benefit to consumers. And so this is a cleaner look at that situation of the outcome of perfect competition relative to monopolies and then how there is a loss of consumer surplus based on the new marginal revenue, marginal cost outcome on the right side relative to the left side.
But I digressed a bit from the price differentiation concept that I left off with earlier, establishing different prices for similar products to reflect differences in marginal costs and providing those commodities to different groups of buyers. Uh, the necessary conditions for price discrimination is number one, the firm must face a downward sloping demand curve. And I think a lot of things we talked about right now, uh, right before this, should answer that. Number two, the firm must be able to readily and cheaply identify buyers or groups of buyers with predictably different elasticities of demand. And then number three, the firm must be able to prevent resale of the product or service.
So, uh, price discrimination versus personalized pricing. So, it says here, some companies have begun using artificial intelligence techniques to engage in personalized pricing, such as charging different prices to individual consumers. And personalized pricing is most readily implemented online via websites that do not provide price lists, but instead require consumers to enter personalized information, personalized requests for price and product information, and that allows them to sift through what pricing they should offer this consumer based on the information provided. Anyway, I hope that this gives you a decent, uh, look at monopolies and the differences and comparisons and contrasts that it has to perfect competition. I hope you guys have, uh, um, an easy time with this, but I understand that sometimes with these cost curves and so forth, if you're looking at these types of things for the first time, it can be confusing. So, please feel free to let us know if you have any questions. Anyway, uh, stay healthy. Aloha. Take care. Bye-bye.