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Class03_26

# Class03_26 - discriminate in two ways 1 Discriminating...

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26/03/2008 Class Notes (cover part of Chapter 11 in the textbook) Class Outline Price Discrimination & Monopoly Natural Monopoly Price Discrimination & Monopoly Def. Price Discrimination Price Discrimination is the practice of selling different units of a good or service for different prices. Perfect Price Discrimination Def. Perfect Price Discrimination Practice of charging every customer a different price based on their willingness to pay. For perfect price discrimination the demand curve coincides with the Marginal Revenue curve, i.e., when the price decreases only the marginal unit is sold at lower price. Graphically : Q * 2 1 P* P1 P2 \$ D=MR=MB MC Q E 1

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In Equilibrium MB=MC so Allocative efficiency is achieved; The Consumer surplus is zero. All the surplus goes to the monopolist; Perfect Price Discrimination cannot be carried out in practice. However, firms try to
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Unformatted text preview: discriminate in two ways: 1. Discriminating among units of a good 2. Discriminating among groups of buyer • Requirements for price discrimination : 1. Ability to separate buyers into groups; 2. Prohibit resale; Natural Monopoly Natural Monopoly arises as a consequence of natural barriers to entry. Example : Electric power distribution One firm can supply the market at a lower cost than two or more firms! 2 The government intervenes to regulate the natural monopoly • The government may require efficient use of resources, i.e., the firm will have to price such that MB=MC ⇒ p=MC: In the graph below the firm will have to produce where the MC=D at Q p . In this case AC > MC=p ⇒ Profits<0 Graphically: • The government may require to price at the average cost. P=AC ⇒ Profits=0 AC MC P* Q* Q Q p MR D Q 3 P...
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