Lecture 21
Monopolistic behavior
Uniform pricing
y( p )  10  p
TC ( y)  1  2 y
p
y
TPS, CS, PS and DWL
y( p )  10  p
TC ( y)  1  2 y
p
y
Measurement of market power

How to measure market power?
p( y)  10  y



Candidate 1:
Problem:
Candidate 2:
 
y( p)  10  p
Elasticity and markup
y
 
y
p
p
Elasticity and Markup

With MR=0, elasticity=

Elastic part relevant

Markup
How Should a Monopoly Price?
 The
same price for each unit to every
customer - uniform pricing.
discrimination – many different
prices for the same good
 Price
 Can
price-discrimination earn a
monopoly higher profits? How about
efficiency?
Types of Price Discrimination
 1st-degree:
Prices may differ across
output units and buyers.
 2nd-degree:
Prices may differ across
output unit but not buyers. (E.g. bulkbuying discounts.)
 3rd-degree: Prices may differ across
buyers but not output units (student
discounts)
 Two
part tariff
First-degree price discrimination
y( p )  10  p
TC ( y)  1  2 y
p
y
First-degree Price Discrimination
 First-degree
price discrimination
– gives a monopolist all of the
possible gains-to-trade,
– buyers are with zero surplus,
– efficient amount of output.
Third-degree Price Discrimination
 Market
has segments - groups of
buyers (seniors, students, adults, firms)
 In each segment the same price
 Prices different across market
segments
 Common
in real life
Third-degree Price Discrimination
 Example:
individual buyers, firms
 Secrets of happiness
Third-degree Price Discrimination
 Why
price
is smaller?