HW2 - Econ 419 Industrial Organization Jura Liaukonyte Due...

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Econ 419 – Industrial Organization Jura Liaukonyte Homework 2 Due Wed, Feb 14 in class (Happy Valentine’s!) Submit ONE version per study group. Write legibly. I reserve a right not to grade messy or illegible answers. Include a title page, listing the homework number and the names of all members of the study group. PART I – Analytical Problems 1. Welfare effects of third degree price discrimination Should we allow a monopolist to implement the third degree price discrimination? The monopolist will clearly be no worse off than under the uniform pricing (because he still has the choice of setting prices equal across all market segments). But what about social welfare? Does the monopolist gain more than consumers lose? Can they both gain? The answer depends on two opposing forces: • Price discrimination facilitates access to the market for the consumers for whom the price was previously too high to make any purchase at all. These consumers are very price sensitive, so the monopolist targets them with a special low price. • Price discrimination further segments the market, and transfers the goods away from the less elastic demand segment. The high price and low quantity in this elastic segment may lead to a net welfare loss. Third degree price discrimination will be beneficial if some markets are not served under uniform pricing. When demand is linear, third degree price discrimination will be harmful when all markets are served under uniform
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HW2 - Econ 419 Industrial Organization Jura Liaukonyte Due...

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