Topic10_Price Discrimination

Topic10_Price Discrimination - Topic 10 10 Pricing with...

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Topic 10 Pricing with Market Power Dr. Ratna K. Shrestha
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Examples: Would it bother you to know hat I paid for this seat? 2 what I paid for this seat?
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t the monopoly outcome consumers earn Capturing CS and DWL At the monopoly outcome, consumers earn surplus and there also exists DWL. C P MC P m MR D 3 Q m Q
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apt ring CS and DWL Capturing CS and DWL y raising the price for those who are willing By raising the price for those who are willing to pay more than P m , the monopolist can raise its surplus. Similarly by lowering the price for those who are willing to pay less, the monopolist can turn DWL into its surplus. So a monopolist by price discriminating (or charging non-uniform price) depending upon the price the consumers are willing to pay an increase its surplus 4 can increase its surplus.
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ho can Price Discriminate? Who can Price Discriminate? A firm must have a monopoly power 1 . A firm must have a monopoly power. 2 . Consumers must differ in their demand lasticities and the monopolist must be able elasticities and the monopolist must be able to identify them (perhaps by asking identity cards). 3 . No arbitrage (or resales). If low paying customers (such as senior citizen) can resale the product then price discrimination doesn’t work. 5
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irst egree Price Discrimination First-Degree Price Discrimination First degree or perfect price discrimination g pp charges each customer the maximum or reservation price he/she is willing to pay. In this case CS = 0 and the monopolist extracts all he surplus. It is difficult to implement owever Close Examples: however. Close Examples: Car salesperson (differences in price based on bargaining powers) universities (differences in financial aid 6 based on household incomes)
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First-Degree Price Discrimination in Practice /Q Those who are willing to pay more than $/Q P 2 P 1 uniform (monopoly) price P* 4 are charged higher prices (such as P 1 , P 2 , …) and those who are willing to pay les MC P 3 are charged accordingly. P* 4 iscriminating up P 5 P 6 Discriminating up to P 6 (competitive price) will increase rofits D MR profits 7 Quantity Q*
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Second-Degree Price Discrimination ractice of charging different prices per unit Practice of charging different prices per unit for different quantities of the same good.
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Topic10_Price Discrimination - Topic 10 10 Pricing with...

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