Economics Exam 3 Cheat Sheet - Chapter 14 Price Discrimination and Public Strategy Price discrimination selling the same product at different prices to

Economics Exam 3 Cheat Sheet - Chapter 14 Price...

This preview shows page 1 - 2 out of 2 pages.

Chapter 14: Price Discrimination and Public Strategy Price discrimination: selling the same product at different prices to different customers. 1) If the demand curves are different, it is more profitable to set different prices in different markets than a single price that covers all markets. 2) To maximize profit, the firm should set a higher price in markets with more inelastic demand. 3) Arbitrage (buying low in one market and selling high in another market) makes it difficult for a firm to set different prices in different markets, thereby reducing the profit from price discrimination. To succeed at price discrimination, monopolist must prevent arbitrage. Example of PD: Firms offer different versions of a product for the purpose of segmenting customers into different markets. Perfect price discrimination : each customer is charged their maximum willingness to pay. Consumers end up with zero consumer surplus and all of the gains from trade goes to the monopolist. Since the PPD monopolist gets all the gains from trade, the PPD monopolist has an incentive to maximize the gains from trade, which means no deadweight loss. A PPD monopolist produces the efficient quantity until MR=MC. Price discrimination is bad if the total output with PD falls or stays the same, but if output increases under price discrimination, then total surplus will usually increase. Tying : occurs when to use one good, the consumer must use a second good that is sold only by the same firm. A firm can price-discriminate by tying two goods and carefully setting their prices. Bundling : is requiring that products be bought together in a bundle or package. It can increase efficiency especially when fixed costs are high and marginal costs are low. Bundling means that fixed costs are spread across more consumers, which raise the incentive to innovate. Firms want to price-discriminate because PD increases profits and may also increase total surplus. PD is most likely to increase total surplus when it increases output and when there are large fixed costs of development. PD for pharmaceuticals lowers the price for consumers in poor countries and by increasing profits, PD increases the incentive to research and develop new drugs. Less elastic demand = higher price and more elastic demand = lower price (elasticity = escape) Chapter 15: Oligopoly and Game Theory Cartel is a group of suppliers who try to act as if they were a monopoly. Tend to collapse due to cheating by members, new entrants and demand response, and government prosecution and regulation. The incentive to cheat: When a monopolist increases quantity beyond the profit-maximizing quantity, the monopolist hurts itself. But, when a cartel cheater increases quantity beyond the profit-maximizing quantity, the cheater benefits itself and hurts other cartel members (Figure 15.3). When a monopolist lowers the price and increases its sales, it enjoys all of the gains from selling more (green area left panel), but it bears all the losses from selling its previous output at a lower price (red area). If a four-
Image of page 1

Subscribe to view the full document.

Image of page 2

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask You can ask ( soon) You can ask (will expire )
Answers in as fast as 15 minutes