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Unformatted text preview: Lecture 21: Monopoly Behavior c & 2008 Je/rey A. Miron Outline 1. Introduction 2. Quantity and Quality Discounts 3. Group Discounts 4. Bundling 5. Two-Part Tari/s 6. Summary 1 Introduction We have so far studied two key components of the theory of the &rm: pure compe- tition and pure monopoly. These two extremes are important and interesting because they provide theoret- ical benchmarks and key insights. Plus, occasionally, one of these two extremes is a reasonable description of a particular market. In general, however, we think of markets as being in betweenthese two extremes in various ways. One way that real markets di/er from these idealized theoretical markets is in the degree of market power. Virtually every &rm has some degree of market power it can raise its price without losing all its customers and virtually every &rm faces some degree of competition from other &rms. A second way that real markets di/er from the idealized markets we have studied is that they engage in a much broader range of output and pricing decisions than we have allowed so far. In particular, once one departs from the assumptions of perfect competition, where all &rms make identical products, a host of other decisions becomes available to &rms: what combination of quality and quantity to produce, how much to advertise, 1 whether to bundle di/erent products together as one purchase, whether to o/er di/erent prices for di/erent size purchases or to di/erent groups, and so on. In this lecture, we examine some of the most basic characteristics of these kinds of decisions. We are interested in several questions: 1. Why do these phenomena occur? What is the bene&t to the &rm? 2. What are the implications of these phenomena for consumer and producer surplus? 3. Should government policy (in particular, anti-trust) concern itself with some or all of these phenomena? We do not have time to address these topics in detail; the goal is to highlight the key issues and make you aware of these more detailed aspects of &rm behav- ior. If these topics interest you, they receive much more detailed treatment in the Departments o/erings in industrial organization. 2 Quantity and Quality Discounts One interesting aspect of &rm pricing decisions is variation in the price per unit of quantity or quality. This is one example of what is known as second-degree price discrimination. It is often referred to as non-linear pricing since the price per unit purchased is not constant, but depends on how much a given customer buys. Stated another way, a given customer can pay di/erent amounts per unit depending on how much is purchased at one time. As a simple example, consider di/erent sized bottles of ketchup. The price per ounce of ketchup di/ers substantially between large bottles and small bottles. Some of this di/erence could reect di/erences in the cost of the bottles, or in handling costs related to the di/erent sizes. But the di/erences are too large to be due mainly to costs, so for simplicity, we ignore the possibility of cost di/erences here....
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This note was uploaded on 09/16/2009 for the course ECONOMICS 1010A taught by Professor Jeffreya.miron during the Fall '09 term at Harvard.
- Fall '09