Chapter 28 29 - Chapter Twenty-Five Price Discrimination...

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Chapter Twenty-Five Price Discrimination
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How Should a Monopoly Price? So far a monopoly has been thought of as a firm which has to sell its product at the same price to every customer. This is uniform pricing. Potentially a monopolist can charge every consumer a different price and they can charge a different price for every unit that a consumer buys. This is price discrimination. We assume that not all the consumers are alike. Resale is prohibited. Can price-discrimination earn a monopoly higher profits?
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Types of Price Discrimination 1st-degree: Perfect price discrimination. Each output unit is sold at a different price. Prices may also differ across buyers. P j = P j (j,Q j ). 2nd-degree: The price paid by a buyer can vary with the quantity demanded by the buyer but cannot depend on the buyers identity or his personal characteristics. • bulk-buying discounts. P j (Q j ) = P k (Q j ) for all k.
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Types of Price Discrimination 3rd-degree: Price cannot depend on how much you buy but can depend on your identity or personal characteristics. P j =P j (j) P j (Q j ) = P j (Q k ) for all Q k. E.g., senior citizen and student discounts vs. no discounts for middle-aged persons.
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First-degree Price Discrimination Each output unit is sold at a different price. Price may differ across buyers. We can consider each buyer in isolation The monopolist can discover the buyer’s valuation for the first unit of the product, for the second unit, and so on.
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First-degree Price Discrimination p(y) y $/output unit MC(y) y p y ( ) Sell the th unit for $ y p y ( ).
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First-degree Price Discrimination p(y) y $/output unit MC(y) y p y ( ) ′′ y p y ( ) ′′ Sell the th unit for $ Later on sell the th unit for $ y p y ( ). ′′ y p y ( ). ′′
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First-degree Price Discrimination p(y) y $/output unit MC(y) y p y ( ) ′′ y ′′′ y p y ( ) ′′ p y ( ) ′′′ Sell the th unit for $ Later on sell the th unit for $ Finally sell the th unit for marginal cost, $ y p y ( ). ′′ y p y ( ). ′′ ′′′ y p y ( ).
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First-degree Price Discrimination p(y) y $/output unit MC(y) y p y ( ) ′′ y ′′′ y p y ( ) ′′ p y ( ) ′′′ The gains to the monopolist on these trades are: and zero. p y MC y p y MC y ( ) ( ), ( ) ( ) ′ - ′ ′′ - ′′ The consumer’s gain is zero.
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First-degree Price Discrimination 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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First-degree Price Discrimination First-degree price discrimination gives a monopolist all of the possible gains-to- trade, leaves the buyers with zero surplus, and supplies the efficient amount of output.
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Second degree price discrimination q 1 x 1 Dell The monopolist can charge the price depending on the quantity that the consumer is buying But in general it cannot condition the price on the personal characteristics The monopoly can be offering the consumers the choice between a few price – quantity pairs, each pair: this much P (in total) for the q units that the consumer buys.
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25.02
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This note was uploaded on 06/18/2010 for the course ECOS 2001 taught by Professor None during the Three '09 term at University of Sydney.

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Chapter 28 29 - Chapter Twenty-Five Price Discrimination...

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