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Chapter 25-26 Monopoly Part II (Third degree price discrimination…
Chapter 25-26
Monopoly
Part II
Deadweight loss pf monopoly
Interpretation of DWL
the value of transactions not taking place due to market distortion
Why doesn't the monopolist sell the next unit at some p>MC?
The monopolist must charge the same price on all units. Selling the next unit at a price below pm would mean he has to charge that price on all
inframarginal units
If monopolist could charge different prices on different units, his output choice would be different
Price Discrimination:
selling different units of output at different prices
First degree price discrimination
different prices on different units, and price can differ from person to person
Also referred to as
perfect price discrimination
Second degree price discrimination
different prices on different units, but two consumers that buy the same amount must be charged the same price
e.g. bulk discount
Third degree price discrimination
different prices on different units, but every unit sold to a given person sells for the same price
e.g. student discount, senior discount
For price discrimination to work, there has to be little potential for
resale
Generally, the lower the degree, he harder to implement
First degree price discrimination
the monopolist must know exactly the demand curves of every consumer
closest real-world examples: auto dealers, vendors in a street market, other transactions where price is determined by bargining
NO deadweight loss
CS=0, TS=PS
Third degree price discrimination
Most common and least difficult to implement form of price discrimination
Suppose the monopolist can identify two groups of people
Then the profits are give by
π = p1(q1)q1 + p2(q2)q2 − c(q1 + q2)
FOC gives
That is to say, the monopolist will set MR=MC in each market. This also implies that
Intuition: if MR was higher in one market, it would be more profitable to sell more units in that market and fewer units in the other
Recall that from MR1(q1)=MR2(q2) and MR=p(1+1/epsilon),we know at optimum
If p1>p2, then
This tells, more
inelastic group
will pay a higher price. This is because more elastic groups are more price-sensitive
