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Discrimination if portuguese market is very small

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Unformatted text preview: uese market is very small and/or demand is low, If however, a firm that is not allowed to price discriminate may find it profitable to set p(D) everywhere. Then banning price discrimination is welfare detrimental, Then as profits of firms are reduced, Portuguese consumer surplus reduced, German consumer surplus unchanged. Price discrimination only reduces welfare if sold quantity Price if not higher when compared to situation without price discrimination. discrimination. 9 Market Power UK motorcycle manufacturer Triumph is not allowed UK (since 2000) to ban exports from Belgium and NL to UK. (since It has 10% market share in UK, and 5% each in Belgium and NL. Charged higher price in UK. Does it make sense to prohibit per se the prevention of Does parallel exports in case of firms with little market power? parallel Such practice of firm with little market share may have very little Such effect in magnitude on welfare. effect Firms that price discriminate gain higher profits, which may Firms trigger investment, and make them more competitive in the long run. run. little reason to justify prohibition on welfare grounds little In EC, this is a political reason: citizens of different countries in In EC should get the same deal (single, integrated market idea) EC 10 10 Price discrimination as monopolisation device So So far, we discussed effects of PD given the structure of the market. the Can it be used to change the structure? pre-empt entry force exit of competitors 11 11 Price discrimination as monopolisation device Imagine a monopolist produces a good, where Imagine transportation cost matter transportation Located in centre of country, whose population is Located concentrated around two cities (north/south) concentrated Suppose a new competitor sets up plant in neighboring Suppose country in the north. country Monopolist has incentive to charge higher price to Monopolist southern people than to northern ones. southern Is it a problem? Same reasoning as before: depends if nothern market Same will be served in case of banning price differentiation. will 12 12 Pricing Strategies: Predatory Pricing Low prices are typically associated with higher consumer Low welfare welfare However, „too low“ prices may have anti-competitive However, goals goals forcing rival to exit or pre-empting potential entry llow prices improve welfare only in period of „predation“, ow afterwards predator will increase prices, and welfare will be harmed in long run harmed „predatory pricing“: sacrifice profits in short run to predatory eliminate competition, and get high profits in long run eliminate Identification of predation: short term loss, and existence Identification of market power by predator of Problem: what pricing strategy is lawful and competitive, Problem: and which is predation, and thus unlawful? and 13 13 Pricing Strategies: Predatory Pricing Larger firms typically charge lower prices due to Larger economies of scale or scope economies However, predation occurred historically, but no rigorous However, economic theory existed economic Typically: „deep pocket“ argument llarge firm may start price war with small firm that results in arge losses for both losses but small firm has limited resources: only „small pocket“ small firm will not be able to survive with losses for long time, small and will exit industry at some point. and llarge firm will increase prices and recoup...
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