3 Price Discrimination

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "3 Price Discrimination"

Transcription

1 Joe Chen 26 3 Price Discrimination There is no universally accepted definition for price discrimination (PD). In most cases, you may consider PD as: producers sell two units of the same physical good at different prices (, either to the same consumer or to different consumers.) Note that: There is no PD if the price difference reflects the costs of serving; One cannot infer PD does not happen when differentiated products are sold to different consumers. It is useful to classify, according to Pigou (1920), price discriminations by first, second, and third degree PD: First degree (1 ) PD: producers capture the whole consumer surplus; Second degree (2 ) PD: in the case of incomplete information, producers use selfselection devices to extract consumer surplus; Third degree (3 ) PD: there exist direct signals about demands, and producers use this signal to price-discriminate.

2 Joe Chen First degree (Perfect) PD One necessary condition for the 1 PD is complete information: producers know the demands. Given this, how can a monopolistic producer engage in 1 PD? Consider a market with n identical consumers and (market) demand function D(p). Denote the inverse demand as: p = P (q). The monopoly can offer a tariff T (q) such that: T (q) = Z q Z0 q 0 P (x)dx/n P (x)dx/n where >0, andq c is the competitive market demand. if q = q c /n otherwise, Consider an affine pricing schedule (or a two-part tariff): T (q) =A + pq. Note that when A =0, T (q) is a linear tariff. LetS c = S c /n + p c q T (q) = 0 where p c is the competitive market demand. Z q c 0 if q>0 if q =0, [P (x) p c ]dx, andoffer: When consumers have different demands: S i c T (q) = + pc q 0 if q>0 if q =0. No that 1 PD has the same price and quantity as in perfect competition.

3 Joe Chen Third degree (multimarket) PD Based on some direct signal (exogenous information), a producer can divide consumers into m groups. It is then as if there are m independent markets. Note that for the markets to be truly independent, we need to assume: No arbitrage between groups; The producer cannot price discriminate within the group. Hence the monopolistic producer charges a linear tariff for each group. That is, the monopoly solves: X m ³X max p m id i (p i ) C D i(p i ). p 1,p 2,...,p m i=1 i=1 Recall the multiproduct monopoly s problem (independent demands, separable costs), we know that p i are determined according to the inverse elasticity rule: where ε i = D 0 i (p i)p i /D i (p i ). p i C 0 (q) p i = 1 ε i, Some examples: Low-price discount to firsttimemagazinesubscribers; Student and senior citizen discounts; Legal and medical service bills; Goods in poorcountries that do not reflect transportation costs and import taxes, etc. Compared to uniform pricing in all markets, 3 PD makes the monopoly and consumers in high-elasticity markets better off, while it makes consumers in the lowelasticity markets worse off. How about total social surplus? Let C q i = ³X ³X i c, and consumer surplus S i (p i )= R p D i(x)dx. We can write the change i q i

4 Joe Chen 29 in social surplus when monopoly practices 3 PD with {p 1,...,p m } and uniform price with p: W = X [S i(p i ) S i (p)] + X (p i c)q i X (p c)q i i i i. Note that: S i (p i ) S i (p)+si(p)(p 0 i p), since: S 00 i ( ) = D0 i ( ) > 0, ors( ) is convex. Hence, S i (p i ) S i (p) q i [p i c (p c)], or, S i (p i ) S i (p)+(p i c)q i (p c)q i (p i c)q i (p i c)q i =(p i c) q i. Hence, we have the lower bound for the social surplus change: W X i (p i c) q i. Similarly, S i (p) S i (p i )+S 0 i(p i )(p p i ), following the same reasoning, we have the upper bound: W X i (p c) q i. Thus, a necessary condition for the 3 PD to be preferred socially is that it raises total output. The elimination of the 3 PD can be dangerous if it reduces outputs significantly (for example, it leads to the closure of markets). Sometimes it can be a win-win situation (Pareto improvement) to allow firms to price-discriminate.

5 Joe Chen Second degree PD (arbitrage and screening) Note that the absence of direct signals empowers consumers with the ability to engage in personal arbitrage. Perfect PD is, in general, not possible. However, even when there is no exogenous information (direct signals) for the monopolistic producer to tell the consumers apart, a monopoly can still extract some consumer surplus. Let s first go through a common way of 2 PD the two-part tariff Two-part tariffs A two-part tariff, T (q) =A + pg, offers a (continuum) menu of bundles {T,q} located on a straight line. Uniform pricing is a special case of two-part tariff when A =0. Suppose the consumers have the following preferences: θv (q) T if she pays T for quantity q U = 0 otherwise; where: V (0) = 0, V 0 ( ) > 0, andv 00 ( ) < 0. LetV (q) = 1 (1 q)2 2 and there be two groups of consumers: one with taste parameter θ 1 and the other taste parameter θ 2. Let the fraction of consumers with θ = θ 1 be λ, andθ 1 <θ 2. The monopolistic producer has a constant marginal cost c<θ 1. Solving the consumer s problem: we have: and consumer surplus S i (p) except for T as: max.θ i V (q) (A + pq), q q i = D i (p) =1 p/θ i, S i (p) =θ i V (D i (p)) pd i (p) = (θ i p) 2. 2θ i The aggregate demand at price p can be expressed as: D(p)=λD 1 (p)+(1 λ)d 2 (p) =1 p[λ/θ 1 +(1 λ)/θ 2 ] 1 p/ e θ.

6 Joe Chen 31 Perfect PD: charging a price p 1 = c and A i = (θ i p) 2 2θ i.henceprofit Π 1 : Π 1 = λ (θ 1 c) 2 2θ 1 +(1 λ) (θ 2 c) 2 2θ 2. This is the highest profit that a monopoly can get; Welfare is optimal. Monopoly pricing (linear tariff): the monopoly solves: max. (p c)d(p). p And, the monopoly price is: p 2 =(c + e θ)/2. The monopoly may want to give up consumers with lower θ, andservesonlyθ 2 consumers. This cannot be optimal if: or, D 1 ( c + θ 2 ) 0, 2 θ 1 c + θ 2. 2 Let s assume this inequality holds. Two-part tariff: A = S 1 (p). Now, the monopoly solves: max.s 1 (p)+(p c)d(p). p And, the monopoly price is: p 3 = cθ 1 /(2θ 1 e θ). Compare these results, we have: Π 1 Π 3 Π 2, and (under the assumption: θ 1 (c + θ 2 )/2), c = p 1 <p 3 <p 2. Note again, ignoring the redistributive concerns, welfare (social surplus) is higher under the two-part tariff than that of the linear one, because: the marginal price is lower.

7 Joe Chen 32 In general, for any linear tariff T (q) =pq with p>c, there exists a two-part tariff et (q) = A e + epq such that, if consumers are offered the choice between T and T e,both types of consumers as well as the monopoly are made better off. As it turns out it is tricky to demonstrate this algebraically. We ll get into the idea in just a minute. For now, a figure helps a lot... Consider c<ep <p,anda e =(p ep)d 2 (p). Type-θ 1 consumers prefer the linear tariff, whiletype-θ 2 consumers choose the two-part tariff. The change in the monopoly s profit (fromtype-θ 2 consumers) is: (1 λ)[ A e + epd 2 (ep) pd 2 (p) c(d 2 (ep) D 2 (p))] =(1 λ)[ep(d 2 (ep) D 2 (p)) c(d 2 (ep) D 2 (p))] =(1 λ)(ep c)(d 2 (ep) D 2 (p)) > Tie-in Sales and 2 PD Consider a consumer who enjoys one unit of basic (tying) good together with q complementary (tied) goods, and derive surplus: θv (q) T (q). The producer produces the basic good at cost c 0, and the complementary good at cost c per unit. Note that c 0 becomes a fixed cost per customer served. It plays no role in the pricing decision of the complementary good. Suppose tie-in sales are not allowed, and there are competitive firms willing to provide the complementary good at price c. If the producer serves both types of customers, it sets the price of the basic good to S 1 (c), thesurplusofthetype-θ 1 consumers. If tie-in sales are allowed, we have already shown that the producer would charge a price p>cfor the complementary good, and S 1 (p) <S 1 (c) for the basic good. But note that: here, the tie-in sale reduces welfare as long as the producer serves both types of consumers. But the prohibition of tied-in sales may result in only type-θ 2 consumers

8 Joe Chen 33 are served (if (1 λ)s 2 (c) S 1 (c)). In this case, tie-in sales are not necessary detrimental Non-linear tariffs Again, studying a figure helps us to draw the following conclusions: 1. Type-θ 1 (low-demand) consumers derive no net surplus; type-θ 2 (high-demand) consumers derive a positive surplus; 2. The incentive compatibility (personal-arbitrage) constraint for the high-demand consumers are binding; 3. The high-demand consumers purchase the social optimal quantity, q 2 = D 2 (c); the low-demand consumers purchase a suboptimal quantity, q 1 < D 1 (c). Thisisthe so-called absence of distortion at the top. The monopoly s profit is: Π m = λ(t 1 cq 1 )+(1 λ)(t 2 cq 2 ). It chooses two bundles: (T 1,q 1 ) and (T 2,q 2 ) to maximize Π m. There are two kinds of constraints: IR: θ 1 V (q 1 ) T 1 0. The IR (individual rationality) constraints require the consumers to buy. Note that if the IR constraint for type-θ 1 consumers is satisfied, type-θ 2 consumers are automatically willing to buy, because: they can always choose to buy q 1 at T 1 and get net surplus θ 2 V (q 1 ) T 1 > 0. IC: θ 2 V (q 2 ) T 2 θ 2 V (q 1 ) T 1. The IC (incentive compatibility) constraints are used to prevent personal arbitrage (type-θ 2 consumers choose the bundle designed for type-θ 1 consumers). Since the idea is to induce type-θ 2 consumers to reveal their high demands, thus, the IC constraint for type-θ 1 consumers is most likely irrelevant (not binding). We can proceed taking into account only type-θ 2 consumers IC constraint and check later if the IC constraint for type-θ 1 consumers is satisfied.

9 Joe Chen 34 When Π m is maximized, it must be the case that both constraints (the IR of type-θ 1 and the IC of type-θ 2 ) are binding; i.e., T 1 = θ 1 V (q 1 ),andθ 2 V (q 2 ) T 2 = θ 2 V (q 1 ) T 1. Hence, T 2 = θ 2 V (q 2 ) θ 2 V (q 1 )+T 1 = θ 2 V (q 2 ) (θ 2 θ 1 )V (q 1 ). Observe that: Type-θ 1 consumers surplus is entirely appropriated; Note also, T 2 <θ 2 V (q 2 ) so that type-θ 2 consumers enjoy net surplus: (θ 2 θ 1 )V (q 1 ) > 0. Using T 1 and T 2, we can write down the monopoly s problem as: max λ[θ 1V (q 1 ) cq 1 ]+(1 λ)[θ 2 V (q 2 ) (θ 2 θ 1 )V (q 1 ) cq 2 ]. (q 1,q 2 ) The FOCs are: ³ θ 1 V 0 (q 1 )=c/ θ 2 V 0 (q 2 )=c. 1 1 λ λ θ 2 θ 1 θ 1 ; Observe that: 0 < 1 1 λ θ 2 θ 1 λ θ 1 < 1 when: λ ( θ 2 θ 1 θ 2, 1). Hence, as long as both types of consumers are served (λ is not too small), θ 1 V 0 (q 1 ) >c(the quantity consumed by type-θ 1 consumers is suboptimal). Note also: the FOCs V 0 (q 1 ) >V 0 (q 2 ),sincev ( ) is concave, we have q 1 <q 2. Finally, check the IR constraint for type-θ 1 consumers. θ 1 V (q 2 ) T 2 = θ 1 V (q 2 ) θ 2 V (q 2 )+(θ 2 θ 1 )V (q 1 )=(θ 2 θ 1 )[V (q 1 ) V (q 2 )] < 0=θ 1 V (q 1 ) T 1.

10 Joe Chen Quality Discrimination So far, we consider the monopoly discriminates among consumers with different tastes by offering different quantities of the same good at different prices. The same analysis applies to the situation that the monopoly discriminates among consumers with different tastes for quality by offering different qualities at different prices. Consumers have preference U = θs p (if buying), where: s is the quality, and p = p(s). The producer produces s with cost c(s), where:c( ) is increasing and convex. Let q c(s): thecostofqualitys; Let V (q) c 1 (q) =s: the quality obtained at cost q. Then, U = θv (q) p(v (q)) = θv (q) ep(q), where: ep(q) p(v (q)). Moreover, by construction, the monopoly s cost function is linear in q. Therefore, it should be clear now that quality discrimination is identical to the above analysis. device. The monopolistic producer uses lower-quality goods as a market-segmentation

Price Discrimination: Part 2. Sotiris Georganas

Price Discrimination: Part 2. Sotiris Georganas Price Discrimination: Part 2 Sotiris Georganas 1 More pricing techniques We will look at some further pricing techniques... 1. Non-linear pricing (2nd degree price discrimination) 2. Bundling 2 Non-linear

More information

PRICE DISCRIMINATION Industrial Organization B

PRICE DISCRIMINATION Industrial Organization B PRICE DISCRIMINATION Industrial Organization B THIBAUD VERGÉ Autorité de la Concurrence and CREST-LEI Master of Science in Economics - HEC Lausanne (2009-2010) THIBAUD VERGÉ (AdlC, CREST-LEI) Price Discrimination

More information

Lecture 6: Price discrimination II (Nonlinear Pricing)

Lecture 6: Price discrimination II (Nonlinear Pricing) Lecture 6: Price discrimination II (Nonlinear Pricing) EC 105. Industrial Organization. Fall 2011 Matt Shum HSS, California Institute of Technology November 14, 2012 EC 105. Industrial Organization. Fall

More information

2.2 Price Discrimination

2.2 Price Discrimination 2.2 Price Discrimination Matilde Machado Download the slides from: http://www.eco.uc3m.es/~mmachado/teaching/oi-i-mei/index.html 1 2.2 Price Discrimination Everyday situations where price discrimination

More information

SECOND-DEGREE PRICE DISCRIMINATION

SECOND-DEGREE PRICE DISCRIMINATION SECOND-DEGREE PRICE DISCRIMINATION FIRST Degree: The firm knows that it faces different individuals with different demand functions and furthermore the firm can tell who is who. In this case the firm extracts

More information

Second degree price discrimination

Second degree price discrimination Bergals School of Economics Fall 1997/8 Tel Aviv University Second degree price discrimination Yossi Spiegel 1. Introduction Second degree price discrimination refers to cases where a firm does not have

More information

1.4 Hidden Information and Price Discrimination 1

1.4 Hidden Information and Price Discrimination 1 1.4 Hidden Information and Price Discrimination 1 To be included in: Elmar Wolfstetter. Topics in Microeconomics: Industrial Organization, Auctions, and Incentives. Cambridge University Press, new edition,

More information

First degree price discrimination ECON 171

First degree price discrimination ECON 171 First degree price discrimination Introduction Annual subscriptions generally cost less in total than one-off purchases Buying in bulk usually offers a price discount these are price discrimination reflecting

More information

Lecture 9: Price Discrimination

Lecture 9: Price Discrimination Lecture 9: Price Discrimination EC 105. Industrial Organization. Fall 2011 Matt Shum HSS, California Institute of Technology September 9, 2011 September 9, 2011 1 / 23 Outline Outline 1 Perfect price discrimination

More information

Part IV. Pricing strategies and market segmentation

Part IV. Pricing strategies and market segmentation Part IV. Pricing strategies and market segmentation Chapter 9. Menu pricing Slides Industrial Organization: Markets and Strategies Paul Belleflamme and Martin Peitz Cambridge University Press 2010 Chapter

More information

Economics 431 Fall 2003 1st midterm Answer Key

Economics 431 Fall 2003 1st midterm Answer Key Economics 431 Fall 003 1st midterm Answer Key 1) (7 points) Consider an industry that consists of a large number of identical firms. In the long run competitive equilibrium, a firm s marginal cost must

More information

ADVANCED MICROECONOMICS (TUTORIAL)

ADVANCED MICROECONOMICS (TUTORIAL) ELMAR G. WOLFSTETTER, MAY 12, 214 ADVANCED MICROECONOMICS (TUTORIAL) EXERCISE SHEET 4 - ANSWERS AND HINTS We appreciate any comments and suggestions that may help to improve these solution sets. Exercise

More information

2. Price Discrimination

2. Price Discrimination The theory of Industrial Organization Ph. D. Program in Law and Economics Session 5: Price Discrimination J. L. Moraga 2. Price Discrimination Practise of selling the same product to distinct consumers

More information

Conditions for Efficiency in Package Pricing

Conditions for Efficiency in Package Pricing Conditions for Efficiency in Package Pricing Babu Nahata Department of Economics University of Louisville Louisville, Kentucky 40292, USA. e-mail: nahata@louisville.edu and Serguei Kokovin and Evgeny Zhelobodko

More information

Economics of Regulation. Price Discrimination

Economics of Regulation. Price Discrimination Economics of Regulation Price Discrimination Definition A. When a seller charges different prices to different customers for the same product (movies theater $6 Adults $3.50 Children) B. When a seller

More information

Chapter 11 Pricing Strategies for Firms with Market Power

Chapter 11 Pricing Strategies for Firms with Market Power Managerial Economics & Business Strategy Chapter 11 Pricing Strategies for Firms with Market Power McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved. Overview I. Basic

More information

1) If the government sets a price ceiling below the monopoly price, will this reduce deadweight loss in a monopolized market?

1) If the government sets a price ceiling below the monopoly price, will this reduce deadweight loss in a monopolized market? Managerial Economics Study Questions With Solutions Monopoly and Price Disrcimination 1) If the government sets a price ceiling below the monopoly price, will this reduce deadweight loss in a monopolized

More information

Answers to Chapter 6 Exercises

Answers to Chapter 6 Exercises Answers to Chapter 6 Exercises Review and practice exercises 6.1. Perfect price discrimination. Consider a monopolist with demand D = 10 p and marginal cost MC = 40. Determine profit, consumer surplus,

More information

MICROECONOMICS II PROBLEM SET III: MONOPOLY

MICROECONOMICS II PROBLEM SET III: MONOPOLY MICROECONOMICS II PROBLEM SET III: MONOPOLY EXERCISE 1 Firstly, we analyze the equilibrium under the monopoly. The monopolist chooses the quantity that maximizes its profits; in particular, chooses the

More information

p, we suppress the wealth arguments in the aggregate demand function. We can thus state the monopolist s problem as follows: max pq (p) c (q (p)).

p, we suppress the wealth arguments in the aggregate demand function. We can thus state the monopolist s problem as follows: max pq (p) c (q (p)). Chapter 9 Monopoly As you will recall from intermediate micro, monopoly is the situation where there is a single seller of a good. Because of this, it has the power to set both the price and quantity of

More information

2.4 Multiproduct Monopoly. 2.4 Multiproduct Monopoly

2.4 Multiproduct Monopoly. 2.4 Multiproduct Monopoly .4 Multiproduct Monopoly Matilde Machado Slides available from: http://www.eco.uc3m.es/oi-i-mei/.4 Multiproduct Monopoly The firm is a monopoly in all markets where it operates i=,.n goods sold by the

More information

Figure 1, A Monopolistically Competitive Firm

Figure 1, A Monopolistically Competitive Firm The Digital Economist Lecture 9 Pricing Power and Price Discrimination Many firms have the ability to charge prices for their products consistent with their best interests even thought they may not be

More information

Part IV. Pricing strategies and market segmentation. Chapter 8. Group pricing and personalized pricing

Part IV. Pricing strategies and market segmentation. Chapter 8. Group pricing and personalized pricing Part IV. Pricing strategies and market segmentation Chapter 8. Group pricing and personalized pricing Slides Industrial Organization: Markets and Strategies Paul Belleflamme and Martin Peitz Cambridge

More information

Sustainable Energy Systems

Sustainable Energy Systems Theory of Regulation PhD, DFA M. Victor M. Martins Semester 2 2008/2009 2. 1 Natural monopoly regulation 2. 1 Natural monopoly regulation: efficient pricing, linear, non linear pricing and Ramsey pricing.

More information

Solution to Homework Set 7

Solution to Homework Set 7 Solution to Homework Set 7 Managerial Economics Fall 011 1. An industry consists of five firms with sales of $00 000, $500 000, $400 000, $300 000, and $100 000. a) points) Calculate the Herfindahl-Hirschman

More information

KEELE UNIVERSITY MID-TERM TEST, 2007 BA BUSINESS ECONOMICS BA FINANCE AND ECONOMICS BA MANAGEMENT SCIENCE ECO 20015 MANAGERIAL ECONOMICS II

KEELE UNIVERSITY MID-TERM TEST, 2007 BA BUSINESS ECONOMICS BA FINANCE AND ECONOMICS BA MANAGEMENT SCIENCE ECO 20015 MANAGERIAL ECONOMICS II KEELE UNIVERSITY MID-TERM TEST, 2007 Thursday 22nd NOVEMBER, 12.05-12.55 BA BUSINESS ECONOMICS BA FINANCE AND ECONOMICS BA MANAGEMENT SCIENCE ECO 20015 MANAGERIAL ECONOMICS II Candidates should attempt

More information

ECON 600 Lecture 5: Market Structure - Monopoly. Monopoly: a firm that is the only seller of a good or service with no close substitutes.

ECON 600 Lecture 5: Market Structure - Monopoly. Monopoly: a firm that is the only seller of a good or service with no close substitutes. I. The Definition of Monopoly ECON 600 Lecture 5: Market Structure - Monopoly Monopoly: a firm that is the only seller of a good or service with no close substitutes. This definition is abstract, just

More information

Price Discrimination

Price Discrimination Perfect Imperfect E. Glen Weyl University of Chicago Lecture 10 Turbo Section Elements of Economic Analysis II Fall 2011 Introduction Perfect Imperfect Key assumption of last lecture was uniform pricing

More information

Oligopoly: Cournot/Bertrand/Stackelberg

Oligopoly: Cournot/Bertrand/Stackelberg Outline Alternative Market Models Wirtschaftswissenschaften Humboldt Universität zu Berlin March 5, 2006 Outline 1 Introduction Introduction Alternative Market Models 2 Game, Reaction Functions, Solution

More information

Exercises for Industrial Organization Master de Economía Industrial 2012-2013. Matilde Pinto Machado

Exercises for Industrial Organization Master de Economía Industrial 2012-2013. Matilde Pinto Machado Exercises for Industrial Organization Master de Economía Industrial 2012-2013 Matilde Pinto Machado September 11, 2012 1 Concentration Measures 1. Imagine two industries A and B with concentration curves

More information

An Integrated Approach to Teaching Price Discrimination

An Integrated Approach to Teaching Price Discrimination An Integrated Approach to Teaching Price Discrimination Ann Marsden and Hugh Sibly Abstract Textbooks present the three degrees of price discrimination as a sequence of independent pricing methods and

More information

Economics 335, Spring 1999 Problem Set #7

Economics 335, Spring 1999 Problem Set #7 Economics 335, Spring 1999 Problem Set #7 Name: 1. A monopolist has two sets of customers, group 1 and group 2. The inverse demand for group 1 may be described by P 1 = 200? Q 1, where P 1 is the price

More information

Monopoly. E. Glen Weyl. Lecture 8 Price Theory and Market Design Fall 2013. University of Chicago

Monopoly. E. Glen Weyl. Lecture 8 Price Theory and Market Design Fall 2013. University of Chicago and Pricing Basics E. Glen Weyl University of Chicago Lecture 8 Price Theory and Market Design Fall 2013 Introduction and Pricing Basics Definition and sources of monopoly power Basic monopolistic incentive

More information

Moral Hazard. Itay Goldstein. Wharton School, University of Pennsylvania

Moral Hazard. Itay Goldstein. Wharton School, University of Pennsylvania Moral Hazard Itay Goldstein Wharton School, University of Pennsylvania 1 Principal-Agent Problem Basic problem in corporate finance: separation of ownership and control: o The owners of the firm are typically

More information

SOLUTIONS TO HOMEWORK SET #4

SOLUTIONS TO HOMEWORK SET #4 Sloan School of Management 15.010/15.011 Massachusetts Institute of Technology SOLUTIONS TO HOMEWORK SET #4 1. a. If the markets are open to free trade, the monopolist cannot keep the markets separated.

More information

All these models were characterized by constant returns to scale technologies and perfectly competitive markets.

All these models were characterized by constant returns to scale technologies and perfectly competitive markets. Economies of scale and international trade In the models discussed so far, differences in prices across countries (the source of gains from trade) were attributed to differences in resources/technology.

More information

Price Discrimination

Price Discrimination Price Discrimination Mark Armstrong Department of Economics University College London October 2006 1 Introduction In broad terms, one can say that price discrimination exists when two similar products

More information

Efficient Access Pricing and Endogenous Market. Structure. Kaniska Dam, Axel Gautier and Manipushpak Mitra CAHIER DE RECHERCHE / WORKING PAPER

Efficient Access Pricing and Endogenous Market. Structure. Kaniska Dam, Axel Gautier and Manipushpak Mitra CAHIER DE RECHERCHE / WORKING PAPER CAHIER DE RECHERCHE / WORKING PAPER Efficient Access Pricing and Endogenous Market Structure. Kaniska Dam, Axel Gautier and Manipushpak Mitra January 08 / N 200801/02 Efficient Access Pricing and Endogenous

More information

Problem Set 9 Solutions

Problem Set 9 Solutions Problem Set 9 s 1. A monopoly insurance company provides accident insurance to two types of customers: low risk customers, for whom the probability of an accident is 0.25, and high risk customers, for

More information

Prices versus Exams as Strategic Instruments for Competing Universities

Prices versus Exams as Strategic Instruments for Competing Universities Prices versus Exams as Strategic Instruments for Competing Universities Elena Del Rey and Laura Romero October 004 Abstract In this paper we investigate the optimal choice of prices and/or exams by universities

More information

1 Monopoly Why Monopolies Arise? Monopoly is a rm that is the sole seller of a product without close substitutes. The fundamental cause of monopoly is barriers to entry: A monopoly remains the only seller

More information

Oligopoly and Strategic Pricing

Oligopoly and Strategic Pricing R.E.Marks 1998 Oligopoly 1 R.E.Marks 1998 Oligopoly Oligopoly and Strategic Pricing In this section we consider how firms compete when there are few sellers an oligopolistic market (from the Greek). Small

More information

The No Surcharge Rule and Card User Rebates: Vertical Control by a Payment Network

The No Surcharge Rule and Card User Rebates: Vertical Control by a Payment Network The No Surcharge Rule and Card User Rebates: Vertical Control by a Payment Network by Marius Schwartz Daniel R. Vincent * March 15, 2004 Abstract: The No Surcharge Rule (NSR) prohibits merchants from charging

More information

Monopolistic Competition

Monopolistic Competition Monopolistic Chapter 17 Copyright 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College

More information

Managerial Economics

Managerial Economics Managerial Economics Unit 4: Price discrimination Rudolf Winter-Ebmer Johannes Kepler University Linz Winter Term 2012 Managerial Economics: Unit 4 - Price discrimination 1 / 39 OBJECTIVES Objectives Explain

More information

Pricing to Mass Markets. Simple Monopoly Pricing, Price Discrimination and the Losses from Monopoly

Pricing to Mass Markets. Simple Monopoly Pricing, Price Discrimination and the Losses from Monopoly Pricing to Mass Markets Simple Monopoly Pricing, Price Discrimination and the Losses from Monopoly Many Buyers Costly to set individual prices to each consumer to extract their individual willingness-to-pay.

More information

Lecture 10 Monopoly Power and Pricing Strategies

Lecture 10 Monopoly Power and Pricing Strategies Lecture 10 Monopoly Power and Pricing Strategies Business 5017 Managerial Economics Kam Yu Fall 2013 Outline 1 Origins of Monopoly 2 Monopolistic Behaviours 3 Limits of Monopoly Power 4 Price Discrimination

More information

Examples on Monopoly and Third Degree Price Discrimination

Examples on Monopoly and Third Degree Price Discrimination 1 Examples on Monopoly and Third Degree Price Discrimination This hand out contains two different parts. In the first, there are examples concerning the profit maximizing strategy for a firm with market

More information

A.2 The Prevalence of Transfer Pricing in International Trade

A.2 The Prevalence of Transfer Pricing in International Trade 19. Transfer Prices A. The Transfer Price Problem A.1 What is a Transfer Price? 19.1 When there is a international transaction between say two divisions of a multinational enterprise that has establishments

More information

Final Exam 15 December 2006

Final Exam 15 December 2006 Eco 301 Name Final Exam 15 December 2006 120 points. Please write all answers in ink. You may use pencil and a straight edge to draw graphs. Allocate your time efficiently. Part 1 (10 points each) 1. As

More information

2. Information Economics

2. Information Economics 2. Information Economics In General Equilibrium Theory all agents had full information regarding any variable of interest (prices, commodities, state of nature, cost function, preferences, etc.) In many

More information

Price Discrimination

Price Discrimination E. Glen Weyl University of Chicago Lecture 10 Regular Section Elements of Economic Analysis II Fall 2011 Introduction Key assumption of last lecture was uniform pricing Everyone pays same for ever unit

More information

Marginal cost. Average cost. Marginal revenue 10 20 40

Marginal cost. Average cost. Marginal revenue 10 20 40 Economics 101 Fall 2011 Homework #6 Due: 12/13/2010 in lecture Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework

More information

Chapter 11 Pricing With Market Power

Chapter 11 Pricing With Market Power Chapter 11 Pricing With Market Power Review Questions 1. Suppose a firm can practice perfect first-degree price discrimination. What is the lowest price it will charge, and what will its total output be?

More information

Why payment card fees are biased against merchants

Why payment card fees are biased against merchants Why payment card fees are biased against merchants Julian Wright November 2010 Abstract I formalize the popular argument that payment card networks such as MasterCard and Visa charge merchants too much

More information

Chapter 15: Monopoly WHY MONOPOLIES ARISE HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS

Chapter 15: Monopoly WHY MONOPOLIES ARISE HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS Chapter 15: While a competitive firm is a taker, a monopoly firm is a maker. A firm is considered a monopoly if... it is the sole seller of its product. its product does not have close substitutes. The

More information

Second Hour Exam Public Finance - 180.365 Fall, 2007. Answers

Second Hour Exam Public Finance - 180.365 Fall, 2007. Answers Second Hour Exam Public Finance - 180.365 Fall, 2007 Answers HourExam2-Fall07, November 20, 2007 1 Multiple Choice (4 pts each) Correct answer indicated by 1. The portion of income received by the middle

More information

A Detailed Price Discrimination Example

A Detailed Price Discrimination Example A Detailed Price Discrimination Example Suppose that there are two different types of customers for a monopolist s product. Customers of type 1 have demand curves as follows. These demand curves include

More information

Equilibrium Price Dispersion with Consumer Inventories*

Equilibrium Price Dispersion with Consumer Inventories* Journal of Economic Theory 105, 503 517 (2002) doi:10.1006/jeth.2001.2890 Equilibrium Price Dispersion with Consumer Inventories* Pilky Hong SAP Korea; and Department of Management, KonKuk University,

More information

Choice under Uncertainty

Choice under Uncertainty Choice under Uncertainty Part 1: Expected Utility Function, Attitudes towards Risk, Demand for Insurance Slide 1 Choice under Uncertainty We ll analyze the underlying assumptions of expected utility theory

More information

Business Ethics Concepts & Cases

Business Ethics Concepts & Cases Business Ethics Concepts & Cases Manuel G. Velasquez Chapter Four Ethics in the Marketplace Definition of Market A forum in which people come together to exchange ownership of goods; a place where goods

More information

On the Antitrust Economics of the Electronic Books Industry

On the Antitrust Economics of the Electronic Books Industry On the Antitrust Economics of the Electronic Books Industry Germain Gaudin (DICE, Heinrich Heine University Düsseldorf) & Alexander White (School of Economics & Management, Tsinghua University) Postal

More information

CEVAPLAR. Solution: a. Given the competitive nature of the industry, Conigan should equate P to MC.

CEVAPLAR. Solution: a. Given the competitive nature of the industry, Conigan should equate P to MC. 1 I S L 8 0 5 U Y G U L A M A L I İ K T İ S A T _ U Y G U L A M A ( 4 ) _ 9 K a s ı m 2 0 1 2 CEVAPLAR 1. Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes. The market

More information

Internet Interconnection and Network Neutrality

Internet Interconnection and Network Neutrality Internet Interconnection and Network Neutrality Jay Pil Choi Doh-Shin Jeon Byung-Cheol Kim June 19, 2012 Abstract This paper analyzes competition between interconnected networks when content is heterogeneous

More information

Lecture Notes. 1 What is Asymmetric Information and why it matters for Economics?

Lecture Notes. 1 What is Asymmetric Information and why it matters for Economics? Lecture Notes The most important development in economics in the last forty years has been the study of incentives to achieve potential mutual gain when the parties have different degrees of knowledge.

More information

Bundling in Cable Television: A Pedagogical Note With a Policy Option. Keith Brown and Peter J. Alexander Federal Communications Commission, USA

Bundling in Cable Television: A Pedagogical Note With a Policy Option. Keith Brown and Peter J. Alexander Federal Communications Commission, USA K. Bundling Brown and in Cable P. J. Alexander Television Bundling in Cable Television: A Pedagogical Note With a Policy Option Keith Brown and Peter J. Alexander Federal Communications Commission, USA

More information

Price competition with homogenous products: The Bertrand duopoly model [Simultaneous move price setting duopoly]

Price competition with homogenous products: The Bertrand duopoly model [Simultaneous move price setting duopoly] ECON9 (Spring 0) & 350 (Tutorial ) Chapter Monopolistic Competition and Oligopoly (Part ) Price competition with homogenous products: The Bertrand duopoly model [Simultaneous move price setting duopoly]

More information

Advertising. Sotiris Georganas. February 2013. Sotiris Georganas () Advertising February 2013 1 / 32

Advertising. Sotiris Georganas. February 2013. Sotiris Georganas () Advertising February 2013 1 / 32 Advertising Sotiris Georganas February 2013 Sotiris Georganas () Advertising February 2013 1 / 32 Outline 1 Introduction 2 Main questions about advertising 3 How does advertising work? 4 Persuasive advertising

More information

The economics of online personalised pricing

The economics of online personalised pricing The economics of online personalised pricing May 2013 OFT1488 Crown copyright 2013 This report has been written by Patrick Coen and Natalie Timan of the OFT, and has benefitted from comments by various

More information

Economics of Insurance

Economics of Insurance Economics of Insurance In this last lecture, we cover most topics of Economics of Information within a single application. Through this, you will see how the differential informational assumptions allow

More information

Profit maximization in different market structures

Profit maximization in different market structures Profit maximization in different market structures In the cappuccino problem as well in your team project, demand is clearly downward sloping if the store wants to sell more drink, it has to lower the

More information

Applying CRM in Information Product Pricing

Applying CRM in Information Product Pricing Applying CRM in Information Product Pricing Wenjing Shang, Hong Wu and Zhimin Ji School of Economics and Management, Beijing University of Posts and Telecommunications, Beijing100876, P.R. China shang_wj83@yahoo.com.cn

More information

Monopoly and Monopsony Labor Market Behavior

Monopoly and Monopsony Labor Market Behavior Monopoly and Monopsony abor Market Behavior 1 Introduction For the purposes of this handout, let s assume that firms operate in just two markets: the market for their product where they are a seller) and

More information

Pareto Efficient Income Taxation with Stochastic Abilities

Pareto Efficient Income Taxation with Stochastic Abilities This revision October 2006 Pareto Efficient Income Taxation with Stochastic Abilities Abstract This paper studies Pareto efficientincometaxationinaneconomywithfinitely-lived individuals whose income generating

More information

Econ 101: Principles of Microeconomics

Econ 101: Principles of Microeconomics Econ 101: Principles of Microeconomics Chapter 14 - Monopoly Fall 2010 Herriges (ISU) Ch. 14 Monopoly Fall 2010 1 / 35 Outline 1 Monopolies What Monopolies Do 2 Profit Maximization for the Monopolist 3

More information

Sourcing and Contracts Chapter 13

Sourcing and Contracts Chapter 13 Sourcing and Contracts Chapter 13 1 Outline The Role of Sourcing in a Supply Chain Supplier Scoring and Assessment Supplier Selection and Contracts Design Collaboration The Procurement Process Sourcing

More information

Why do merchants accept payment cards?

Why do merchants accept payment cards? Why do merchants accept payment cards? Julian Wright National University of Singapore Abstract This note explains why merchants accept expensive payment cards when merchants are Cournot competitors. The

More information

The vertical differentiation model in the insurance market: costs structure and equilibria analysis

The vertical differentiation model in the insurance market: costs structure and equilibria analysis The vertical differentiation model in the insurance market: costs structure and equilibria analysis Denis V. Kuzyutin 1, Maria V. Nikitina, Nadezhda V. Smirnova and Ludmila N. Razgulyaeva 1 St.Petersburg

More information

ECO 199 GAMES OF STRATEGY Spring Term 2004 March 23 ADVERSE SELECTION SCREENING AND SIGNALING. EXAMPLE 1 FAILURE OF EQUILIBRIUM Akerlof s Lemons

ECO 199 GAMES OF STRATEGY Spring Term 2004 March 23 ADVERSE SELECTION SCREENING AND SIGNALING. EXAMPLE 1 FAILURE OF EQUILIBRIUM Akerlof s Lemons ECO 199 GAMES OF STRATEGY Spring Term 2004 March 23 ADVERSE SELECTION SCREENING AND SIGNALING EXAMPLE 1 FAILURE OF EQUILIBRIUM Akerlof s Lemons Private used car market Car may be worth anywhere between

More information

Monopoly: static and dynamic efficiency M.Motta, Competition Policy: Theory and Practice, Cambridge University Press, 2004; ch. 2

Monopoly: static and dynamic efficiency M.Motta, Competition Policy: Theory and Practice, Cambridge University Press, 2004; ch. 2 Monopoly: static and dynamic efficiency M.Motta, Competition Policy: Theory and Practice, Cambridge University Press, 2004; ch. 2 Economics of Competition and Regulation 2015 Maria Rosa Battaggion Perfect

More information

Market Power and Efficiency in Card Payment Systems: A Comment on Rochet and Tirole

Market Power and Efficiency in Card Payment Systems: A Comment on Rochet and Tirole Market Power and Efficiency in Card Payment Systems: A Comment on Rochet and Tirole Luís M. B. Cabral New York University and CEPR November 2005 1 Introduction Beginning with their seminal 2002 paper,

More information

Knowledge Transfer and Partial Equity Ownership

Knowledge Transfer and Partial Equity Ownership Knowledge Transfer and Partial Equity Ownership Arghya Ghosh and Hodaka Morita School of Economics, UNSW Business School University of New South Wales 2nd ATE Symposium, UNSW, December 2014 Introduction

More information

1. Supply and demand are the most important concepts in economics.

1. Supply and demand are the most important concepts in economics. Page 1 1. Supply and demand are the most important concepts in economics. 2. Markets and Competition a. Market is a group of buyers and sellers of a particular good or service. P. 66. b. These individuals

More information

Economic analysis of the market - 1

Economic analysis of the market - 1 Economic analysis of the market - 1 Paolo Buccirossi Rome, April 28 2014 Questions 1. What are the desirable properties (the goals ) of a system to trade (buy and sell) goods or services? 2. Is competition

More information

Health Economics. University of Linz & Demand and supply of health insurance. Gerald J. Pruckner. Lecture Notes, Summer Term 2010

Health Economics. University of Linz & Demand and supply of health insurance. Gerald J. Pruckner. Lecture Notes, Summer Term 2010 Health Economics Demand and supply of health insurance University of Linz & Gerald J. Pruckner Lecture Notes, Summer Term 2010 Gerald J. Pruckner Health insurance 1 / 25 Introduction Insurance plays a

More information

A Model-based Study of the Impact on the Internet of Managed Services and the Spawning of User Innovated Applications

A Model-based Study of the Impact on the Internet of Managed Services and the Spawning of User Innovated Applications A Model-based Study of the Impact on the Internet of Managed Services and the Spawning of User Innovated Applications Debasis Mitra Department of Electric Engineering Columbia University debasismitra@columbia.edu

More information

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY EXERCISES 3. A monopolist firm faces a demand with constant elasticity of -.0. It has a constant marginal cost of $0 per unit and sets a price to maximize

More information

2. Advantages and Disadvantages of Decentralization

2. Advantages and Disadvantages of Decentralization The Fuqua School of Business International Strategy: WBA 434 Duke University Professors Heath, Huddart, & Slotta 1. Overview An essential feature of decentralized firms is responsibility centers (e.g.,

More information

Sharing Online Advertising Revenue with Consumers

Sharing Online Advertising Revenue with Consumers Sharing Online Advertising Revenue with Consumers Yiling Chen 2,, Arpita Ghosh 1, Preston McAfee 1, and David Pennock 1 1 Yahoo! Research. Email: arpita, mcafee, pennockd@yahoo-inc.com 2 Harvard University.

More information

Buyer Search Costs and Endogenous Product Design

Buyer Search Costs and Endogenous Product Design Buyer Search Costs and Endogenous Product Design Dmitri Kuksov kuksov@haas.berkeley.edu University of California, Berkeley August, 2002 Abstract In many cases, buyers must incur search costs to find the

More information

Price Discrimination and Two Part Tariff

Price Discrimination and Two Part Tariff Sloan School of Management 15.010/15.011 Massachusetts Institute of Technology RECITATION NOTES #6 Price Discrimination and Two Part Tariff Friday - October 29, 2004 OUTLINE OF TODAY S RECITATION 1. Conditions

More information

Managerial Economics & Business Strategy Chapter 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

Managerial Economics & Business Strategy Chapter 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets Managerial Economics & Business Strategy Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets I. Perfect Competition Overview Characteristics and profit outlook. Effect

More information

Pricing with Perfect Competition. Business Economics Advanced Pricing Strategies. Pricing with Market Power. Markup Pricing

Pricing with Perfect Competition. Business Economics Advanced Pricing Strategies. Pricing with Market Power. Markup Pricing Business Economics Advanced Pricing Strategies Thomas & Maurice, Chapter 12 Herbert Stocker herbert.stocker@uibk.ac.at Institute of International Studies University of Ramkhamhaeng & Department of Economics

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Economics 103 Spring 2012: Multiple choice review questions for final exam. Exam will cover chapters on perfect competition, monopoly, monopolistic competition and oligopoly up to the Nash equilibrium

More information

Software piracy and social welfare: an analysis of protection mechanisms and. pricing strategies

Software piracy and social welfare: an analysis of protection mechanisms and. pricing strategies Software piracy and social welfare: an analysis of protection mechanisms and pricing strategies aris Cevik, Gokhan Ozertan* Department of Economics, ogazici University, ebek, 34342 Istanbul, Turkey bstract

More information

-1- Worked Solutions 5. Lectures 9 and 10. Question Lecture 1. L9 2. L9 3. L9 4. L9 5. L9 6. L9 7. L9 8. L9 9. L9 10. L9 11. L9 12.

-1- Worked Solutions 5. Lectures 9 and 10. Question Lecture 1. L9 2. L9 3. L9 4. L9 5. L9 6. L9 7. L9 8. L9 9. L9 10. L9 11. L9 12. -1- Worked Solutions 5 Lectures 9 and 10. Question Lecture 1. L9 2. L9 3. L9 4. L9 5. L9 6. L9 7. L9 8. L9 9. L9 10. L9 11. L9 12. L10 Unit 5 solutions Exercise 1 There may be practical difficulties in

More information

Unraveling versus Unraveling: A Memo on Competitive Equilibriums and Trade in Insurance Markets

Unraveling versus Unraveling: A Memo on Competitive Equilibriums and Trade in Insurance Markets Unraveling versus Unraveling: A Memo on Competitive Equilibriums and Trade in Insurance Markets Nathaniel Hendren January, 2014 Abstract Both Akerlof (1970) and Rothschild and Stiglitz (1976) show that

More information

9.1 Cournot and Bertrand Models with Homogeneous Products

9.1 Cournot and Bertrand Models with Homogeneous Products 1 Chapter 9 Quantity vs. Price Competition in Static Oligopoly Models We have seen how price and output are determined in perfectly competitive and monopoly markets. Most markets are oligopolistic, however,

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that

More information