lecture_8 - Monopoly behaviour Price Discrimination - need...

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ECOS2001 Lecture 8 1 Monopoly behaviour Price Discrimination - need to be able to prevent arbitrage 1 st degree price discrimination – prevent arbitrage between consumer and for each unit sold for an individual consumer; full information about each consumers valuation for each good 2 nd -degree price discrimination – not possible to identify the type of consumer; require consumers to ‘self-select’ 3 rd -degree price discrimination – can prevent arbitrage between groups but not within groups; monopolist can identify which group a consumer belongs to, but cannot prevent resale between consumers of the same type
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ECOS2001 Lecture 8 2 First-degree Price Discrimination - sell to each consumer at a price P = MB for each unit provided MB MC - profit maximised (all surplus accrues to the monopolist) - gains from trade maximised (why?); DWL = 0 - can also use a two-part tariff to achieve first-degree PD - set per-unit fee p = MC of final unit sold; fixed F = CS
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ECOS2001 Lecture 8 3
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ECOS2001 Lecture 8 4 Two-part tariff Two part tariff charges consumers two distinct fees 1. A fixed fee F 2. A per-unit fee p The fixed fee can be an access fee, membership or joining fee, price of an essential element of the product The per-unit fee is a fee per unit that the customer consumes (the price per unit of water consumed, electricity consumed, etc)
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ECOS2001 Lecture 8 5 D q P MC c q* F With a two part tariff, charge fixed fee F and a marginal price of c. Consumers will pay F and consume q* units. The tariff extracts all of the surplus from consumers and there is zero DWL
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ECOS2001 Lecture 8 6 Third-degree price discrimination Price paid by buyers in a given group is the same for all units purchased. But price may differ across buyer groups. Example: Two markets, 1 and 2. y1 is the quantity supplied to market 1. Market 1’s inverse demand function is p1(y1). y2 is the quantity supplied to market 2. Market 2’s inverse demand function is p2(y2). For given supply levels y1 and y2 the firm’s profit is 12 111 2 2 2 1 2 (, ) () ( ) ( ) yy p p c Π= + +
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ECOS2001 Lecture 8 7 The profit-maximization conditions are or that () 12 111 11 1 2 1 0 c yy pyy y y y ∂∂ + + Π =− × + = 222 22 1 2 2 0 cy y y y y y y + + Π × + = 2 c y + = + 21 2 c y + = +
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ECOS2001 Lecture 8 8 () 12 111 2 2 2 1 2 ( ) cy y pyy p y y yy y y ∂∂ + == + So we have MR1(y1) = MR2(y2) says that the allocation y1, y2 maximizes the revenue from selling y1 + y2 output units. E.g. if MR1(y1) > MR2(y2) then an output unit should be moved from market 2 to market 1 to increase total revenue.
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This note was uploaded on 04/20/2010 for the course ECOS 2001 taught by Professor None during the One '09 term at University of Sydney.

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lecture_8 - Monopoly behaviour Price Discrimination - need...

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