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15 Monopoly, Price Discrimination and Regulation

15 Monopoly, Price Discrimination and Regulation - Monopoly...

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1 Monopoly, Price Discrimination & Regulation Hall and Lieberman, 3 rd edition, Thomson South-Western, Chapter 9
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2 MC = ATC MR Demand Figure 1a Can the monopolist do better than charge a single price? Profit Profit P M ATC Π/Q Q M
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3 MC = ATC MR Demand Figure 1b Can the monopolist do better? Profit Profit P M ATC Π/Q Can the monopolist extract consumer surplus? Can the monopolist expand output profitably beyond the single price monopolist level? Q M
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4 Price Discrimination Two types of monopoly 1. Single-price monopoly Firm that is limited to charging same price for each unit of output sold 2. Price discrimination monopoly Different prices are charged to different customers based on their willingness to pay for the good not based on prejudice, stereotypes, or ill-will toward any person or group
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5 Requirements for Price Discrimination Demand curve m ust be a downward-sloping demand curve for the firm’s output Firm must be able to identify consumers willing to pay more Firm must be able to prevent low-price customers from reselling to high-price customers Arbitrage
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6 Price Discrimination and Consumers Why does monopoly like price discriminate? always benefits owners of a firm, increasing its profit but harms some consumers since price discrimination raises price for some consumer above price they would pay under a single-price policy Additional profit for the firm is equal to monetary loss of consumers
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7 Figure 2a: Without price Discrimination -- price is $120 for all consumers 30 E ATC 80 $120 D MR MC (a) Number of Round-trip Tickets Dollars per Ticket Profits from standard monopoly profit maximization
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8 Figure 2b: Price Discrimination -- price is $160 for some consumers, which harms consumers 30 Dollars per Ticket 120 D MR MC 10 $160 Additional profit from price discrimination – charge a higher price for business traveler Number of Round-trip Tickets (b)
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9 Price Discrimination That Benefits Consumers Price discrimination benefits monopoly at the same time it benefits a group of consumers
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