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Monopoly Behavior - Chapter Twenty-Five Monopoly Behavior...

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Chapter Twenty-Five Monopoly Behavior
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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 . Can price-discrimination earn a monopoly higher profits?
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Types of Price Discrimination 1st-degree : Each output unit is sold at a different price. Prices may differ across buyers. 2nd-degree : The price paid by a buyer can vary with the quantity demanded by the buyer. But all customers face the same price schedule. E.g., bulk-buying discounts.
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Types of Price Discrimination 3rd-degree : Price paid by buyers in a given group is the same for all units purchased. But price may differ across buyer groups. 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. It requires that the monopolist can discover the buyer with the highest valuation of its product, the buyer with the next highest valuation, 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 consumers’ gains are zero.
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First-degree Price Discrimination p(y) y $/output unit MC(y) ′′′ y So the sum of the gains to the monopolist on all trades is the maximum possible total gains-to-trade. PS
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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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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.
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Third-degree Price Discrimination A monopolist manipulates market price by altering the quantity of product supplied to that market.
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