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Econ 101 Week 2 Notes - Monopoly Price Discrimination Joel M. David January 11, 2010 1 Monopoly Price Discrimination Last week we saw a monopolist that set a single price to maximize pro&ts, taking into account the impact of that price on the demand for its product. However, it is possible that the monopolist is able to sell its output to di/erent consumersmarkets at di/erent prices. This is price discrimination. First-degree, or perfect, price discrimination: charge each consumer the price she is willing to pay, i.e., extract all consumer surplus. In this case, the monopolist must be able to identify the demand function of each buyer. Third-degree price discrimination: charge each market a di/erent price, i.e., optimize price in each market separately. Here, the monopolist must know the demand function only for each market. Second-degree price discrimination: choose price schedule to induce buyers to separate themselves de- pending on their demand. An example is the two-part tari/, where the &rm charges a &xed fee for the right to consume and then a uniform price for each unit consumed. 1.1 Extended Problem 14.6 Suppose a monopolist can produce any level of output it wishes at a constant marginal (and average) cost of \$5 per unit. Assume the monopoly sells its goods in two di/erent markets separated by some distance. The demand curve in the &rst market is given by Q 1 = 55 & P 1 and the demand curve in the second market is given by Q 2 = 70 & 2 P 2 a) If the monopolist can maintain the separation between the two markets, what level of output should be produced in each market, and what price will prevail in each market? What are total pro&ts in this situation?... View Full Document

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