Econ exam 3.docx - The Principles of Price Discrimination...

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The Principles of Price Discrimination 1a. If the demand curves are different, it is more profitable to set different prices in different markets than a single price that covers all markets. 1b. To maximize profit, the firm should set a higher price in markets with more inelastic demand. 2. Arbitrage makes it difficult for a firm to set different prices in different markets, thereby reducing the profit from price discrimination. -The first principle tells us that a firm wants to set different prices in different markets. The second principle tells us that a firm may not be able to set different prices in different markets. To succeed at price discrimination, the monopolist must prevent arbitrage. arbitrage —buying low in one market and selling high in another market. perfect price discrimination (PPD) the situation that exists when each customer is charged his or her maximum willingness to pay/ perfectly price-discriminating monopolist produces until P = MC tying a form of price discrimination in which one good, called the base good, is tied to a second good called the variable good bundling the requirement that products be bought together in a bundle or package/ can increase profits Firms want to price-discriminate because price discrimination increases profits. Price discrimination may also increase total surplus. Price discrimination is most likely to increase total surplus when it increases output and when there are large fixed costs of development. Oligopolies and Game Theory An oligopoly is a market dominated by a small number of firms. A cartel is an oligopoly that can maximize its joint profits by limiting competition and producing the monopoly quantity. Cartels tend to collapse and lose their power for three reasons:1) Cheating by the cartel members. 2)New entrants and demand response 3) Government prosecution and regulation/But when a cartel cheater increases quantity beyond the profit-maximizing quantity, the cheater benefits itself and hurts other cartel members . dominant strategy a strategy that has a higher payoff than any other strategy no matter the strategies of other players prisoner's dilemma situations where the pursuit of individual interest leads to a group outcome that is in the interest of no one. Ex: Arms race, Pepsi vs Coke tacit collusion when firms limit competition with one another, but they do so without explicit agreement or communication barriers to entry factors that increase the cost to new firms of entering an industry. 4 Barriers 1) Control over a key resource or input -oil and diamonds are two goods in which cartels have been partially successful because these natural resources are found in only a few places in the world 2) Economies of scale- The advantages of large-scale production mean that it is much cheaper for five car manufactures to make 3 million cars each than for 500 manufacturers to make 30,000 cars each 3)Network effects -Some goods are more valuable the more people use them. 4)Government Barriers
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