cheatsheet exam 2 #2.docx - Chapter 14 Price Discrimination...

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Chapter 14: Price Discrimination More subs=more elastic Price discrimination: selling same product at diff. P to diff. customers ; produces efficient level of output; if total output increases under P disc., then total surplus and welfare will increase (larger market=more profitable) compared to simply mon. pricing MORE ELASTIC=MORE SUBS=MORE PRICE SENSITIVE=LOWER PRICES LESS PRICE SENSITIVE=MORE INELASTIC=MORE LIKELY TO USE PPD To use P disc.: 1. Firm must have mark. power & face >2 markets with diff. D curves 2. Determining which consum. comes from which mark. must be simple 3. Limited ability to resell 1A. If the D curves are diff., it is more profitable to set diff. P in diff. markets than a single price for all markets. 1B. To max. profit, monopolist should ^ P in markets w/ more INELASTIC DEMAND (markup if D=inelastic) 2. Arbitrage (buy low, sell ^) makes p discri. difficult,; aka reduces profits 1A&1B: tell us what a firm wants to set diff. prices in diff. markets 2: tells us that a firm may not be able to set diff. price in diff. market. Prevent arbitrage to succeed at P discri. Perfect price discri.: charging each customer their max. willingness to pay . 0=CS all gains of trade go to mon. surplus, No DWL b/c of eff. output. Produces efficient quantity; produce until P=MC (same as comp. market) (ex. coupons, elastic dem. students will use coupons inelastic kids wont) Tying: based good (printer) is tied to variable good (ink); v. good shows willingness to pay Bundling: bought in a package of goods (L&R shoe). Increases eff. when fixed costs are high and MC are low b/c the high fixed costs are spread across more consumers Chapter 15: Oligopoly & Game Theory Oligopoly: market with few large producers; firm in oligopoly that produces more & cuts P earns all the gains for itself & bears only a fraction of the costs Assume : market producing at comp. levels: P=MC no firm can make above-norm profit; then 1 firm cut output Qo-Q1, raising P to P1 & every firm makes a profit b/c P1>MC -Firm is large relative to the total size of the market. A firm in an ol. has some influence over P & an incentive to reduce output & ^ P from comp. levels (P most likely above comp. levels but below monop. levels) Cartel: attempts to move a market from comp. to “as if controlled by a monopolist”; undifferentiated product & small # of producers; try to reduce supply, increase profits, and raise prices (ex. oil & OPEC) -Restrict output if you cooperate with cartel agreement, expand output if you cheat Work best w/ limited geographic options for entry , Last in SR but break down in LR bc firms can enter WHY GOV’T CARTELS STRONGER: support & enforcement by the gov’t (ex. poor nations, gov’ts regulars enrich themselves through cartels) Ex. 4 industries form a cartel. 1. Agree to produce MR=MC, Q=Qm 2. Set product. quota for each member Tend to collapse/lose power 3: 1. Each firm has a strong incentive to cheat: when a member cheats & increases Q beyond profit-max. Q, the cheater gains from selling more & bears only quarter of the losses from the lower P. The fall in P is spread across all other members 2. New entrant & D response
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