Lecture Notes for chap 11

# Lecture Notes for chap 11 - Lecture Notes for Pindyck and...

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Lecture Notes for Pindyck and Rubinfeld Chapter 11: Pricing with Market Power Example: A Theater’s Profit Based on the Pricing Method Used 1

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First Degree Price Discrimination or Perfect Price Discrimination With Perfect First Degree Price Discrimination, customers pay their maximum willingness to pay . In this way, the monopolist captures all the consumer surplus (and turns it into profit). The “willingness to pay” is also referred to as the “reservation price.” With first degree price discrimination, the MR curve is no longer relevant to the monopolist’s decision. It’s the demand curve - representing willingness to pay - that is relevant. (In other words, the MR is the demand curve for the first degree price discriminator.) It’s necessary for the firm to be able to identify a customer’s willingness to pay. p , \$ per unit 6 5 4 3 2 1 Q , Units per day 6 5 4 3 2 1 0 MC e Demand, Marginal revenue MR 1 = \$6 MR 2 = \$5 MR 3 = \$4 2
In practice, perfect first degree price discrimination might not be possible, so a firm may charge a number of different prices representing the approximate reservation prices of consumers – capturing less than all the consumer surplus, but more than a monopolist that charges a single price. MC D Q P P 3 P 2 P 1 P 4 3

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Competitive, Single-Price, and Perfect Discrimination Equilibria The quantity produced by the first degree price discriminator is the same as the perfect competition quantity, which is larger than the quantity produced by the single price (i.e. non-discriminating) monopolist. Therefore there is no deadweight loss with perfect price discrimination. However, all the CS under competition is captured as PS for the perfect price discriminator. s c d p , \$ per unit E D C B A Q , Units per day Q Q = Q MC s Demand, MR MR s p c = MC c e c e s p s p 1 MC 1 MC d 4
Second Degree Price Discrimination or Quantity Discrimination The willingness to pay for the first few units of a good is high, then the willingness to pay for additional units is less. Second Degree Price Discrimination entails charging different prices for different quantities of the good. Examples: Quantity Discounts (generally) and Block Pricing (for electricity, for example). (a) Second Degree or Quantity Discrimination The first 20 units cost \$70 each. The next 20 units cost \$50 each. p 1 , \$ per unit 30 50 70 90 Q , Units per day 20 40 9 0 mc Demand A = \$200 C = \$200 B = \$1,200 D = \$200 5

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This table compares the CS, PS, and deadweight loss between second degree price discrimination (last slide) and single price monopoly (this slide) using the same demand curve and MC. The deadweight loss is less with quantity (or second degree price) discrimination than with the single price (i.e. non-price discriminating monopoly. The second degree price discriminator gets more PS than the single price monopolist. CS is less when there is second degree price discrimination than with the single price monopolist.
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## This note was uploaded on 04/19/2011 for the course ECON 101 taught by Professor Gul during the Spring '11 term at Lahore School of Economics.

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Lecture Notes for chap 11 - Lecture Notes for Pindyck and...

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