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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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