Lecture_15_final

Lecture_15_final - Chapter 11 Pricing with Market Power...

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Unformatted text preview: Chapter 11 Pricing with Market Power Last Time Monopolists Pricing Rule: MC=MR but MR=P(1+1/Ed) Monopoly is inefficient: creates a deadweight loss Antitrust Laws are used to prevent monopoly Roadmap Capturing Consumer Surplus Price Discrimination: First, Second and Third degree Segregating different types of consumers Example of price discrimination in airline tickets Introduction Pricing with market power (imperfect competition) requires the individual producer to know much more about the characteristics of demand as well as manage production All pricing strategies we will examine are means of capturing consumer surplus and transferring it to the producer Capturing Consumer Surplus Quantity $/Q D MR P max MC The firm would like to charge higher price to those consumers willing to pay it - A P* Q* A P 1 Firm would also like to sell to those in area B but without lowering price to all consumers B P 2 Both ways will allow the firm to capture more consumer surplus Capturing Consumer Surplus Price discrimination is the practice of charging different prices to different consumers for similar goods Must be able to identify the different consumers and get them to pay different prices Price Discrimination First Degree Price Discrimination Charge a separate price to each customer: the maximum or reservation price they are willing to pay How can a firm profit? The firm produces Q* MR = MC We can see the firms variable profit the firms profit ignoring fixed costs Area between MR and MC Consumer surplus area between demand and price Price Discrimination If the firm can price discriminate perfectly, each consumer is charged exactly what they are willing to pay MR curve is no longer part of output decision Incremental revenue is exactly the price at which each unit is sold the demand curve Additional profit from producing and selling an incremental unit is now the difference between demand and marginal cost P* Q* Without price discrimination, output is Q* and price is P*. Variable profit is the area between the MC & MR (yellow). Perfect First-Degree Price Discrimination Quantity $/Q With perfect discrimination, firm will choose to produce Q** increasing variable profits to include purple area. Consumer surplus is the area above P* and between 0 and Q* output. P max D = AR MR MC Q** P C Note: variable profits= As q increases, what happens to profits, i.e. MR-MC. Efficiency and First-Degree Price Discrimination Is first-degree price discrimination inefficient? No! There is no inefficiency in this market, no deadweight loss Consumers get no surplus Firms get all the surplus in this market First-Degree Price Discrimination In practice, perfect price discrimination is almost never possible 1. Impractical to charge every customer a different price (unless very few customers) 2. Firms usually do not know reservation price of each customer Firms can discriminate imperfectly First-Degree Price...
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Lecture_15_final - Chapter 11 Pricing with Market Power...

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