Econ 281 Chapter12a - Ch 12: Capturing Surplus Any firm...

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1 Ch 12: Capturing Surplus Any firm with market power (such as a monopolist) has an incentive to capture (obtain) consumer surplus in order to increase its profits Consumer surplus can be captured though: -Price Discrimination -Tie-In’s -Advertising -Often capturing surplus is disguised as (or intended as) a beneficial progrm
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2 PRICE DISCRIMINATION is the act of  charging different prices to different consumers  in order to capture consumer surplus. Like burns, three basic types of price  discrimination exist: First Degree Second Degree Third Degree (unlike burns 1 st  degree is the “worst”)
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3 In order for price discrimination to take place: 1) A firm must have market power   -a PC firm that raises price will get zero sales 2) The firm must be able to distinguish between  consumers   -the firm must know consumer demand or  elasticity of demand 3) The firm must be able to prevent resale
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4 In first degree price discrimination, the monopolist  charges each consumer their maximum  willingness to pay (ie: each quantity is sold at  its intersection on the demand curve) Examples: -Auctions (higher willingness to pays will push up  price) -Sizing up customers (asking questions relating to living arrangements and work, evaluating dress  and speech patterns)
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5 MC=S Demand MR Q M P M P C Q C A B C D E DWL = C+E CS with monopoly: A PS with monopoly:B+D
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6 MC=S Demand MR Q M P M P C Q C A B C D E DWL = ZERO! CS with 1 st Degree Price Dis.: 0 PS with 1 ST Degree PD: A+B+C+D+E
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First Degree Price Discrimination ELIMINATES  consumer surplus (each consumer pays their  maximum amount) First Degree Price Discrimination ELIMINATES  deadweight loss (monopolists are able to 
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Econ 281 Chapter12a - Ch 12: Capturing Surplus Any firm...

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