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Intermediate Micro Chap 26

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0% found this document useful (0 votes)
35 views41 pages

Intermediate Micro Chap 26

Microecon slides

Uploaded by

歐陽元柏
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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• Chapter 26 Monopoly Behavior

• Key Concept: the second-degree price


discrimination.

• We see how the low end is distorted and


how the high end is given some surplus.
• Chapter 26 Monopoly Behavior

• We have seen two extremes, the


competitive market and the monopolized
market.

• In reality, most industries are in between.


• A firm which has some monopoly has
more options than a firm in a perfectly
competitive industry.

• It can use complicated pricing and


differentiate itself.

• We will examine how firms enhance and


exploit their market power.
• A monopolist is inefficient (produces too
little) because producing more implies the
price has to be lower.

• This is not the case if a monopolist can


sell different units of outputs at different
prices or price discriminate.
• First-degree price discrimination (perfect
price discrimination): the monopolist
sells different units of outputs for
different prices and these prices may
differ from person to person.
• Second-degree price discrimination:
prices differ across the units of goods, but
not across people.
• Third-degree price discrimination: prices
differ across people, but a given person
pays the same price for all units.
• First-degree: unit and person

• Second-degree: unit

• Third-degree: person
• First-degree: every unit is sold to the
consumer who values it most highly at
the highest price the consumer is willing
to pay for it.
• Since the monopolist leaves no
consumers’ surplus, all surplus goes to
the monopolist.

• Rightly because consumers are left with


no surplus, when considering marginally
increasing one unit, the monopolist is
comparing the marginal willingness to
pay to MC.

• Therefore, SS is maximized.
• We have interpreted the first-degree price
discrimination as selling each unit at the
maximum price a monopolist could
command.

• We can also think of it as selling a fixed


amount of the good at a “take it or leave
it” price.
• Second-degree: also known as non-linear
pricing since the price per unit of output
is not constant, but depends on how much
you buy.
• For instance, 1 may be a business traveler
and 2 may be a tourist.

• A monopolist may want to charge 1 A


plus cost and 2 B plus cost.

• But how can we tell 1 from 2?


• The monopolist can offer different price-
quantity packages so that the consumers
can self select.
• Imagine a case with consumers 1 and 2.

• The MC is set to 0.
• A monopolist would want to offer x10 at
price A and x20 at price A+B+C.

• Can we mimic the perfect discrimination?

• Who will mimic whom?


• By self-selection, the high-end consumer
would rather choose x10 at price A
because this would leave him the surplus
of B.

• If he instead chooses x20 at price A+B+C,


his surplus is 0.
• Can we mimic the perfect discrimination?

• Who will mimic whom?


• To leave the surplus B to 2, a monopolist
could try (x10, A) and (x20, A+C).

• The monopolist would then earn A from


1 and A+C from 2.

• Is this the best a monopolist can do?


• Intuition suggests that distorting 1’s
package a bit may be worthwhile.

• Note that the low-end consumer’s


package is distorted so that the high-end
consumer will not choose the low-end
package.
• Compared with perfect price
discrimination, without high-end, low-
end is offered higher quantity but still
ends up with zero surplus.

• Without low-end, high end gets zero


surplus, now gets positive surplus and the
quantity offered is the same.
• Applying this to air travels, by offering a
downgraded product, the airlines can
charge the consumers who need flexible
travel arrangements more for their tickets.
• The third class rail carriage has no roof in
19th century France.

• What the company is trying to do is


prevent the passengers who can pay the
second-class far from traveling the third
class; it hits the poor, not because it wants
to hurt them, but to frighten the rich.
• Third-degree: the most common form of
price discrimination.

• Ex: Student discounts, senior citizens’


discounts, a higher price for the tourists.
• Suppose there are two groups of people
and there is no resale.

• Then the monopolist’s profit


maximization problem becomes
• maxy , y (=p1(y1)y1+ p2(y2)y2-c(y1+y2))
1 2

• FOC becomes
MR1(y1)=MC(y1+y2)=MR2(y2).
• MR1(y1)=p1(y1)[1-1/|1|]
• MR2(y2)=p2(y2)[1-1/|2|]

• Hence p1>p2 if and only if |1|<|2|.

• The market with lower absolute value of


elasticity has a higher price.

• Quite sensible since elasticity measures


how sensitive the group is to prices.
• There are some other often-observed
practices used by firms with monopoly
power.
• Bundling: packages of related goods are
often offered for sale together.

• A software suite (office) consists of a


word processor (word), a spreadsheet
(excel), presentation tool (power point).
• Bundling may be cost saving or it may be
due to complementarities among the
goods involved.

• But there can be reasons involving


consumer behavior. Consider the
following example.

• Assume the marginal cost of producing is


zero.
• Type of consumers word pro spreadsheet
A 120 100
B 100 120

• Suppose the willingness to pay for the


bundle is the sum.
• Type of consumers word pro spreadsheet
A 120 100
B 100 120

• If each item is sold separately, then


revenue will be 400.

• If instead bundling two goods together, the


revenue will be 440. In other words, the
dispersion of willingness to pay may be
reduced.
• Two-part tariffs: amusement park (entry
fee + charge per ride), razor (razor +
blade).

• An amusement park can set one price for


tickets to get into the park and another
price for the rides.
• The price that people are willing to pay to
get into the park will depend on the price
they have to pay for the rides.

• This gives a two-part pricing scheme


called a two-part tariff.
• Consider an example where MC is
constant.

• People go to the park for the rides.

• Optimum is to set the charge per ride to


the marginal cost, then set the entry fee to
extract all the consumers’ surplus.
• Hotelling model: consumers populate
uniformly on a line and two firms have to
choose a position.

• They go to the store that is closest.

• We have too little product differentiation!

• Apply this to voting.


• Chapter 26 Monopoly Behavior

• Key Concept: the second-degree price


discrimination.

• We see how the low end is distorted and


how the high end is given some surplus.

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