Week 9 Lecture - ECON1001 Week 9 Monopoly (cont);...

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ECON1001 Week 9 Monopoly (cont); Monopolistic Competition
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2 Price Discrimination (cont.) Recall, price discrimination involves charging different prices to different customers for the same good Three types First degree (perfect) price discrimination Second degree (quantity) price discrimination Third degree (multi-market) price discrimination
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3 First Degree Price Discrimination The monopolist can charge a different price for every unit sold The monopolist charges the maximum willingness to pay Also called perfect price discrimination because the monopolist extracts all the consumer surplus Requires knowledge of the exact willingness to pay for every consumer for every unit sold Rare in practice, most likely in one-on-one bargaining
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4 $48 million Single Price Monopolist MR 600 Passengers (thousands per year) Price (dollars per trip) D 0 5 8 10 15 20 300 900 1200 1500 1800 2100 MC Consumer surplus Economic profit ATC
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5 Perfect Price Discrimination 600 Passengers (thousands per year) Price (dollars per trip) D 0 6 8 11 15 20 300 900 1200 1400 1800 2100 ATC MC 1600 4 2 Increase in output Increase in economic profit from perfect price discrimination
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6 Efficiency and Perfect Price Discrimination With perfect price discrimination Output increases to the point at which price equals marginal cost - where the marginal cost intersects the demand curve. Output is identical to that of perfect competition. There is no consumer surplus The monopolist captures all the surplus Deadweight loss is zero - perfect price discrimination achieves efficiency.
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7 Second Degree Price Discrimination The monopolist offers different pricing options and allows consumers to select amongst them The monopolist can’t distinguish between the groups The monopolist knows the demand curve for each group Need to cleverly design a set of prices to induce more inelastic groups to pay higher prices Quantity discounts – eg utility bills
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8 D MR ATC Q $ MC Q Q S P P S Second Degree Price Discrimination Fig 10.13 Profit increase due Profit increase due to bulk discounts to bulk discounts Profit increase due Profit increase due to higher prices on to higher prices on small quantities small quantities D MR Q $ ATC MC Q Q S P P S
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9 Third Degree Price Discrimination The monopolist charges different prices to different groups of consumers The monopolist must be able to identify each group and prevent any imitation The monopolist needs to know the demand curve for each group Student discounts Pensioner discounts Financial aid HECS?
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Week 9 Lecture - ECON1001 Week 9 Monopoly (cont);...

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