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# HW2a - Econ 419 Industrial Organization Jura Liaukonyte Due...

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Econ 419 – Industrial Organization Jura Liaukonyte Homework 2 - ANSWERS Due Wed, Feb 14 in class (Happy Valentine’s!) 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 pricing. Suppose there are two groups of consumers: high demand (1) and low demand (2). Inverse demands are p = 12 q1, 0 p 12 p = 8 q2, 0 p 8 a) Compute the inverse demand for the integrated market with two consumer groups. Plot it with p on the vertical and q = q1 +q2 on the horizontal. b) Suppose that the monopolist charges a uniform price on the integrated market and that his marginal cost is c = 0. Find price, quantity sold, consumer surplus and monopolist’s profit. Compute the social welfare (sum of consumer surpluses and profits) (Hint: compute consumer surplus for high demand and low demand segments separately, then add them up. How much does the low demand group buy? How much does the high demand group buy?) c) Now assume that the monopolist can price discriminate between the market segments. Find the prices and quantities for the low demand and the high demand market. Find the monopolist’s profit and total consumer surplus. Show that welfare goes down.

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HW2a - Econ 419 Industrial Organization Jura Liaukonyte Due...

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