monop_quality

monop_quality - Monopoly and Quality Welfare analysis...

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Monopoly and Quality Welfare analysis
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Quality, profits and welfare ± Higher quality is valued by consumers ± How much of this extra surplus can the monopolist extract? ± If not all, monopoly may under-provide quality ± Surprisingly, the opposite could also happen: over-provision ± Illustrate basic ideas with examples.
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Example 1. Quality too low 1 1 l 1 2 m 1 3 h Low Quality High Quality • Sell L quality: p=1, profits =3 Se ll H quality: p=2, profits = 4 Consumer surplus: 0 in first case, 1 in second case. Welfare change = 2 – extra cost Change in profits = 1 – extra cost If 1<extra cost<2, monopolist will choose L which is socially inefficient Key property: Quality increases consumer heterogeneity
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Example 2. Quality too high 2 3 l 3 3 h Low quality High quality • Low quality Æ p=2, profits=4 • High quality Æ p=3, profits=6 • Increase in total surplus = 1 – extra cost • Increase in profits = 2 – extra cost • If 1< extra cost < 2, monopoly chooses
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monop_quality - Monopoly and Quality Welfare analysis...

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