chapter 25 monopoly behavior
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Chapter 25 Monopoly Behavior. 25.1 Price Discrimination. Price discrimination: selling different units of output at different prices. First-degree price discrimination Different units of output for different prices. Price schedules differ from person to person. - PowerPoint PPT PresentationTRANSCRIPT
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Chapter 25 Monopoly Behavior
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25.1 Price Discrimination
Price discrimination: selling different units of output at different prices.
First-degree price discriminationDifferent units of output for different prices.Price schedules differ from person to person.Prices differ across quantities as well as
consumers.
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25.1 Price Discrimination Second-degree price discrimination
Different units of output for different prices.Same price for the same quantity.Prices differ across quantities, but not across
consumers. Third-degree price discrimination
Different prices for different consumers.Same price for the same consumer.Prices differ across consumers, but not across
quantities.
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25.2 First-degree Price Discrimination Discrete good Reservation prices
r1=v(1)-v(0)
r2=v(2)-v(1)
r3=v(3)-v(2) Gross Consumer’s
surplus
r1+ r2+ r3=v(3)-v(0)
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25.2 First-degree Price Discrimination Price of the 1st unit: r1
ΔCS: zero ΔPS: r1-MC
Price of the 2nd unit: r2 ΔCS: zero ΔPS: r2-MC
Price of the 3rd unit: r3 ΔCS: zero ΔPS: r3-MC
Can charge v(3) for the first three units ΔCS: zero ΔPS: v(3)-3*MC
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25.2 First-degree Price Discrimination
To consumer 1 Sell 8 units Charge v1(8)
To consumer 2 Sell 3 units Charge v2(3)
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25.2 First-degree Price Discrimination
Each unit of the good is sold at the reservation price.
No consumer’s surplus generated. The output is Pareto efficient.
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25.2 First-degree Price Discrimination
To consumer 1 Sell x1
0 units Charge v1(x1
0)
To consumer 2 Sell x2
0 units
Charge v2(x20)
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25.3 Second-degree Price Discrimination Two consumers: high demand and low demand. The firm cannot identify the consumers. Zero marginal cost assumed for simplicity. Screening: price-quantity packages that give the
consumers an incentive to choose the right package meant for them.Two contracts: (xH, pH), (xL, pL).The high demand selects (xH, pH).The low demand selects (xL, pL).
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25.3 Second-degree Price Discrimination Full information
case Low demand
xL=x10, pL=A
High demandxH=x2
0, pH=A+B+C
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25.3 Second-degree Price Discrimination Self-selection High demand
will choose (xL, pL) and get B.
xH=x20, pH=A+C
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25.3 Second-degree Price Discrimination Adjustment Low demand
xL=x1m, pL=A
High demandxH=x2
0, pH=A+C+D+E
New profit: E-D
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25.3 Second-degree Price Discrimination Optimum Low demand
xL=x1m, pL=A
High demandxH=x2
0, pH=A+C+D
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EXAMPLE: Price Discrimination in Airfares High demand and low demand: business and
non-business travelers. Restricted fare
Advanced purchase, inconvenient hours, but cheap.
Designed for low demand. Unrestricted fare
Fully flexible but expensive.Designed for high demand.
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25.4 Third-degree Price Discrimination
Two groups of consumers. The firm is able to identify the consumers. Constant unit price for each market. The good cannot be resold. Firm’s problem
1 21 1 1 2 2 2 1 2
,max ( ) ( ) ( )y y
p y y p y y c y y
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25.4 Third-degree Price Discrimination F.O.C.:
MR1(y1)=MC(y1+y2)
MR2(y2)=MC(y1+y2)
or
1 1 1 21 1
1( ) 1 ( )
( )p y MC y y
y
2 2 1 22 2
1( ) 1 ( )
( )p y MC y y
y
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25.4 Third-degree Price Discrimination
|2(y2)| > |1(y1)|: p1>p2
The market with the higher price must have the lower elasticity of demand.
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25.5 Bundling Bundles: packages of related goods offered for sale
together.
Willingness to pay for software components
Type of consumer Word processor Spreadsheet
Type A consumers 120 100Type B consumers 100 120
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25.5 Bundling Selling software separately
Charge $100 for each software. Total revenue: $400.
Bundling Charge $220 for the software suite. Total revenue: $440.
Diversity in consumers’ willingness to pay lowers the price one can charge.
Bundling reduces this diversity.
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25.6 Two-Part Tariffs People go to
Disneyland for rides. Two prices
Admission ticket: t Price of rides: p*
Given p*, t=CS Profits from rides:
(p*-MC)x* Optimal price:
p*=MC
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25.7 Monopolistic Competition
Product differentiationProducts are similar, but not identical.Coca-Cola and Pepsi-Cola.
Monopolistic competitionEach firm faces a downward-sloping demand
curve for its product.Free entry into the industry.Monopolists with zero profits.
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25.7 Monopolistic Competition
Monopolistic competition The demand curve and
the average cost curve must be tangent with each other.