17. Monopoly Markets and Factor Markets

17. Monopoly Markets and Factor Markets - Monopoly Markets...

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Monopoly Markets and Factor Markets Professor John Diamond ECON 370: Microeconomic Theory Lecture 17
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2 Alternative Forms of Monopoly Pricing Uniform pricing single price to all customers Price-discrimination Charge different prices to different customers Requires differentiation of markets w/ no trade Can discriminate because of different elasticities Used to raise profits
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3 Types of Price Discrimination 1st-degree (perfect price discrimination) Each output unit is sold at a different price Prices differ across buyers 2nd-degree (same price schedules) Price varies with quantity demanded by buyer All customers face the same price schedule Volume discounts Quality differentials
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4 Types of Price Discrimination: Continued 3rd-degree (different groups, different prices) Price paid by buyers in group is same for all units Price differs across buyer groups senior citizen discounts student discounts no discounts for high income middle-aged persons
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5 1 st -degree Price Discrimination: Intro Each output unit is sold at a different price Requires that monopolist can discover the buyer w/ highest valuation of its product the buyer w/ next highest valuation Etc., etc. Can’t have trading in the goods
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6 1 st -degree Price Discrimination: Graph p(y) y $/output unit MC(y) y ) y ( p y y ) y ( p ) y ( p Sell the y’th unit for $p(y’) Sell the y’’th unit for $p(y’’) Sell the y’’’ th unit for MC $p(y’’’)
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7 1 st -degree Price Discrimination: Graph p(y) y $/output unit MC(y) y p y ( ) y y p y ( ) p y ( ) Gains to monopolist on these trades are: p(y’) – MC(y’) , p(y’’) – MC(y’’) , and zero The consumers’ gains are zero
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8 1 st -degree Price Discrimination: Graph p(y) y $/output unit MC(y) y The monopolist gets the maximum possible gains from trade PS First-degree price discrimination is Pareto-efficient
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9 1 st -degree Price Discrimination: Summary First-degree price discrimination gives monopolist all possible gains-to-trade leaves buyers with zero consumer surplus But supplies efficient amount of output no “monopolistic restriction of output” no deadweight loss of monopoly
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10 2nd Degree Price Discrimination Second degree Price Discrimination Unable to identify different groups So, offer different pricing structures Try to get groups to “self select” Try to separate high and low demanders Quantity discounts (to find high demanders) Quality differences (to find those willing to pay more for better good or service)
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11 2nd Degree Price Discrimination Example of Quality Differences Airlines: business and leisure travelers Try to identify leisure travelers No refunds, limited and expensive changes Saturday night stays Advance purchase requirements (14 days) Fewer amenities in coach, many more in 1st class Charge business travelers extremely high prices
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17. Monopoly Markets and Factor Markets - Monopoly Markets...

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