Second-Degree Price Discrimination

Size: px
Start display at page:

Download "Second-Degree Price Discrimination"

Transcription

1 Second-Degree Price Discrimination Lecture 4 Goal: Separating buyers into di erent categories by o ering suitable deals: Screening. Monopolist knows that buyers come in di erent types. Maybe some buyers are sophisticated while others are not. There is no way of telling which consumers are sophisticated. Can the monopolist induce the di erent types to choose di erentially in the market? With linear prices, little hope of this. f prices are lower for one of the types, both types would buy at those prices. Allow for non-linear prices. Maybe selling the good in di erentiated qualities might also be a good strategy.

2 Examples of Second-Degree Price Discrimination or Menu Pricing Quantity discounts: Price of six-pack of Coke less than 6 times price of single can. Di erential xed fee, variable fee combinations: Charging for downloading nternet content to smart phones. Package vs. single ride on Linnanmäki. Closely related: Quality versioning First-class, Business and Economy airfare. Di erent speeds on broadband. nsurance with di erent deductibles.

3 nformation Economics: Adverse Selection or Screening Basic Set-Up: An uninformed party (principal) o ers a menu of alternatives to an informed party (agent). n nonlinear pricing, we take the seller to be the principal and the buyer to be the agent. Proposition consists of a list f q l, t l g L l=1. q stands for a physical allocation to the agent. t is the transfer that the agent makes to the principal. Hence choosing q l, t l means that the agent gets physical allocation q l in exchange for paying t l. Notice that this is not a per unit price but a total price for q l.

4 Adverse Selection or Screening Agent s utility from q depends on her type θ 2 Θ. For most of this section, we assume that there are two types: θ 2 fθ H, θ L g. Quasilinear utility. Agent: Principal: u A (θ, q, t) = θv (q) t. u P (θ, q, t) = t c (q). Here we interpret v (q) as the utility from allocation q. Assume increasing utility with diminishing marginal utility: v 0 (q) 0, v 00 (q) 0 c (q) is the cost of providing allocation (quantity or quality) q. Assume increasing convex cost: c 0 (q) 0, c 00 (q) 0.

5 nformation Economics: Adverse Selection or Screening Seller makes an o er fq l, t l g L l=1. She does not know the type of the buyer (but has a belief on the likelihoods of the di erent types). With two types, set λ = Prfθ = θ H g, 1 λ = Prfθ = θ L g. Since the payo functions are common knowledge, she can also calculate, which buyer types will choose which pairs. Buyer of type θ picks the pair q l, t l that gives her the maximal utility or picks nothing if that gives higher utility. Since each type picks at most one pair, we can restrict the number of alternatives o ered to be at most the number of di erent types of buyers. With two types of buyers θ 2 fθ H, θ L g, enough to consider two pairs f(q 1, t 1 ), (q 2, t 2 )g. Call the pair chosen by θ i as q i, t i for i 2 fh, Lg. Examples: nsurance company screening privately known risk types, Monopoly bank screening projects with privately known success rate, Regulator screening public utilities with privately known marginal cost, etc.

6 nformation Economics: Adverse Selection or Screening Since θ H chooses θ H v q H, t H over q L, t L, we have q H t H θ H v q L t L. Similarly for θ L θ L v q L t L θ L v q H t H. These constraints are called incentive compatibility constraints. f the agent can secure a payo of u by not trading with the principal at all, then we also must have: θ H v q H t H u, θ L v q L t L u. These constraints are known as individual rationality or participation constraints.

7 nformation Economics: Adverse Selection or Screening Summing together: The principal s problem is: max λ t H f(q H,t H ),(q L,t L )g c q H + (1 λ) t L c q L subject to θ H v q H θ L v q L t H θ H v q L t L, t L θ L v q H t H, θ H v q H t H u, θ L v q L t L u.

8 nformation Economics: Adverse Selection or Screening This is the simplest form of a problem under adverse selection. The agent has private information at the time when the principal proposes the contract. This private information gives (at least some type of) the agent some surplus even if the principal make a take-it-or-leave-it o er. Model generates a genuine sharing of surplus. Will the outcome be socially e cient as in the case where the principal knows θ? The more general theory framework encompassing this model is called Mechanism Design. Treated in Microeconomic Theory V in the spring term in detail. First steps outlined in the handout.

9 Back to Non-Linear Pricing The monopolist (principal) knows that there are buyers (agents) of di erent types θ. The monopolist cannot determine the type of a buyer. The monopolist can use non-linear schemes and choose some product characteristics. The monopolist sells goods in packages of size q l costing t l. Hence the buyers choose from the menu f q l, t l g L l=1. There are two types of buyers θ 2 fθ H, θ L g. Denote by λ the fraction of buyers that are of type H.

10 Non-Linear Pricing The buyers utilities are given by u (θ, q, t) = θv (q) t, and assume that with θ H > θ L. v is assumed to be concave. The sellers payo : t c (q), where c (q) is a convex increasing cost function for producing quantity q.

11 Non-Linear Pricing We saw in rst degree price discrimination (with two part-tari s) how the monopolist would choose bq i,bt i for i 2 fh, Lg if the type were observable. bq i is e cient : c 0 bq i = θ i v 0 bq i, bt i = θ i v bq i. Suppose the monopolist attempts this in the case where the type is not observable. Then types θ H would select bq L,bt L. f the seller wants θ H to pick q H, t H and θ L to pick q L, t L from f q H, t H, q L, t L g, it must be that: θ H v θ L v q H t H θ H v q L t L θ L v Sum these together to get: θ H θ L v q H v q L t L, (1) q H t H. q L 0.

12 Non-Linear Pricing Furthermore if the buyer can get 0 by refusing to trade: θ H v q H t H 0, (2) θ L v q L t L 0. The rst two inequalities are called the incentive compatibility constraints. They ensure that each type of buyers chooses the bundle that is intended for them. The latter inequalities are called individual rationality constraints. They ensure that the payo from buying is at least as large as the payo from not buying. The monopolist s problem is to maximize pro t subject to these constraints. max λ t H f(q H,t H ),(q L,t L )g subject to C and R. c q H + (1 λ) t L c q L

13 Non-Linear Pricing Analysis: i) C for H must bind. (f not, then R for H not binding and then you can increase pro t by increasing t H a little). ii) R for L must bind. (f not, increase both prices by the same amount). Use R of type L to solve t L = θ L v q L. Use C of H to solve t H = t L + θ H v q H θ H v q L = θ H v q H θ H θ L v q L. But then: We call θ H v q H t H = θ H θ L v q L > 0 if q L > 0. θ H θ L v q L the information rent of the high type.

14 Non-Linear Pricing Hence the maximization problem becomes: max q H,q Lfλ θ H v q H θ H θ L v + (1 λ) θ L v q L c q L g. q L c q H FOC with respect to q H : Hence q H is chosen e ciently. FOC with respect to q L : λ θ H v 0 q H = c 0 q H. θ H θ L v 0 q L = (1 λ) c 0 q L θ L v 0 q L. From this we see that q L is smaller than the e cient level. This re ects the desire to squeeze the rent of the high type.

15 Non-Linear Pricing Conclusion: Higher types buy larger quantities. High types earn positive information rent. Low types earn no rents and are indi erent between participating and not. Pro t maximizing solution trades o e ciency and rent extraction. Next lecture: Applications of this material.

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

3 Price Discrimination

3 Price Discrimination 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

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

EconS 503 - Advanced Microeconomics II Handout on Cheap Talk

EconS 503 - Advanced Microeconomics II Handout on Cheap Talk EconS 53 - Advanced Microeconomics II Handout on Cheap Talk. Cheap talk with Stockbrokers (From Tadelis, Ch. 8, Exercise 8.) A stockbroker can give his client one of three recommendations regarding a certain

More information

Optimal insurance contracts with adverse selection and comonotonic background risk

Optimal insurance contracts with adverse selection and comonotonic background risk Optimal insurance contracts with adverse selection and comonotonic background risk Alary D. Bien F. TSE (LERNA) University Paris Dauphine Abstract In this note, we consider an adverse selection problem

More information

Optimal Auctions. Jonathan Levin 1. Winter 2009. Economics 285 Market Design. 1 These slides are based on Paul Milgrom s.

Optimal Auctions. Jonathan Levin 1. Winter 2009. Economics 285 Market Design. 1 These slides are based on Paul Milgrom s. Optimal Auctions Jonathan Levin 1 Economics 285 Market Design Winter 29 1 These slides are based on Paul Milgrom s. onathan Levin Optimal Auctions Winter 29 1 / 25 Optimal Auctions What auction rules lead

More information

Monopoly and Monopsony

Monopoly and Monopsony Multi-lant Firm. rinciples of Microeconomics, Fall Chia-Hui Chen November, Lecture Monopoly and Monopsony Outline. Chap : Multi-lant Firm. Chap : Social Cost of Monopoly ower. Chap : rice Regulation. Chap

More information

Oligopoly. Chapter 10. 10.1 Overview

Oligopoly. Chapter 10. 10.1 Overview Chapter 10 Oligopoly 10.1 Overview Oligopoly is the study of interactions between multiple rms. Because the actions of any one rm may depend on the actions of others, oligopoly is the rst topic which requires

More information

On the incentives of an integrated ISP to favor its own content

On the incentives of an integrated ISP to favor its own content On the incentives of an integrated ISP to favor its own content Duarte Brito y UNL and CEFAGE-UE dmb@fct.unl.pt Pedro Pereira z AdC and CEFAGE-UE pedro.br.pereira@gmail.com. João Vareda x European Commission

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

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

UCLA. Department of Economics Ph. D. Preliminary Exam Micro-Economic Theory

UCLA. Department of Economics Ph. D. Preliminary Exam Micro-Economic Theory UCLA Department of Economics Ph. D. Preliminary Exam Micro-Economic Theory (SPRING 2011) Instructions: You have 4 hours for the exam Answer any 5 out of the 6 questions. All questions are weighted equally.

More information

CONTRACTUAL SIGNALLING, RELATIONSHIP-SPECIFIC INVESTMENT AND EXCLUSIVE AGREEMENTS

CONTRACTUAL SIGNALLING, RELATIONSHIP-SPECIFIC INVESTMENT AND EXCLUSIVE AGREEMENTS CONTRACTUAL SIGNALLING, RELATIONSHIP-SPECIFIC INVESTMENT AND EXCLUSIVE AGREEMENTS LUÍS VASCONCELOS y Abstract. I analyze a simple model of hold-up with asymmetric information at the contracting stage.

More information

Pricing Cloud Computing: Inelasticity and Demand Discovery

Pricing Cloud Computing: Inelasticity and Demand Discovery Pricing Cloud Computing: Inelasticity and Demand Discovery June 7, 203 Abstract The recent growth of the cloud computing market has convinced many businesses and policy makers that cloud-based technologies

More information

Exam Prep Questions and Answers

Exam Prep Questions and Answers Exam Prep Questions and Answers Instructions: You will have 75 minutes for the exam. Do not cheat. Raise your hand if you have a question, but continue to work on the exam while waiting for your question

More information

Introduction. Agents have preferences over the two goods which are determined by a utility function. Speci cally, type 1 agents utility is given by

Introduction. Agents have preferences over the two goods which are determined by a utility function. Speci cally, type 1 agents utility is given by Introduction General equilibrium analysis looks at how multiple markets come into equilibrium simultaneously. With many markets, equilibrium analysis must take explicit account of the fact that changes

More information

1 Further Pricing Relationships on Options

1 Further Pricing Relationships on Options 1 Further Pricing Relationships on Options 1.1 The Put Option with a Higher Strike must be more expensive Consider two put options on the same stock with the same expiration date. Put option #1 has a strike

More information

Consumer and Producer Surplus. Consumer and Producer Surplus. Consumer Surplus. Consumer Surplus. Consumer Surplus Individual consumer surplus

Consumer and Producer Surplus. Consumer and Producer Surplus. Consumer Surplus. Consumer Surplus. Consumer Surplus Individual consumer surplus Consumer and Consumer and February 6, 2007 Reading: Chapter 6 Introduction Consumer surplus Producer surplus Efficiency and the gains from trade s 2 Introduction Connections to: Opportunity costs to consumers

More information

Prizes and patents: using market signals to provide incentives for innovations

Prizes and patents: using market signals to provide incentives for innovations Prizes and patents: using market signals to provide incentives for innovations V.V. Chari, Mikhail Golosov, and Aleh Tsyvinski March 1, 2009 Abstract Innovative activities have public good characteristics

More information

Market Power, Forward Trading and Supply Function. Competition

Market Power, Forward Trading and Supply Function. Competition Market Power, Forward Trading and Supply Function Competition Matías Herrera Dappe University of Maryland May, 2008 Abstract When rms can produce any level of output, strategic forward trading can enhance

More information

Price Discrimination: Exercises Part 1

Price Discrimination: Exercises Part 1 Price Discrimination: Exercises Part 1 Sotiris Georganas Royal Holloway University of London January 2010 Problem 1 A monopolist sells in two markets. The inverse demand curve in market 1 is p 1 = 200

More information

One-Stop Shopping as a Cause of Slotting Fees: A Rent-Shifting Mechanism

One-Stop Shopping as a Cause of Slotting Fees: A Rent-Shifting Mechanism No 97 One-Stop Shopping as a Cause of Slotting Fees: A Rent-Shifting Mechanism Stéphane Caprice, Vanessa von Schlippenbach May 2012 IMPRINT DICE DISCUSSION PAPER Published by düsseldorf university press

More information

Three Essays on Monopolist Second-degree Discrimination Strategies in the Presence of Positive Network E ects by Gergely Csorba

Three Essays on Monopolist Second-degree Discrimination Strategies in the Presence of Positive Network E ects by Gergely Csorba Three Essays on Monopolist Second-degree Discrimination Strategies in the Presence of Positive Network E ects by Gergely Csorba Submitted to the Economics Department on October 24, 2005, in partial ful

More information

7. EXTERNALITIES AND PUBLIC GOODS

7. EXTERNALITIES AND PUBLIC GOODS 7. EXTERNALITIES AND PUBLIC GOODS In many economic situations, markets are not complete. Certain actions of a rm or a consumer may a ect other economic agents welfare but are not market transactions. These

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

Tiered and Value-based Health Care Networks

Tiered and Value-based Health Care Networks Tiered and Value-based Health Care Networks Ching-to Albert Ma Henry Y. Mak Department of Economics Department of Economics Boston Univeristy Indiana University Purdue University Indianapolis 270 Bay State

More information

Monopoly: Linear pricing. Econ 171 1

Monopoly: Linear pricing. Econ 171 1 Monopoly: Linear pricing Econ 171 1 The only firm in the market Marginal Revenue market demand is the firm s demand output decisions affect market clearing price $/unit P 1 P 2 L G Demand Q 1 Q 2 Quantity

More information

Economics 326: Duality and the Slutsky Decomposition. Ethan Kaplan

Economics 326: Duality and the Slutsky Decomposition. Ethan Kaplan Economics 326: Duality and the Slutsky Decomposition Ethan Kaplan September 19, 2011 Outline 1. Convexity and Declining MRS 2. Duality and Hicksian Demand 3. Slutsky Decomposition 4. Net and Gross Substitutes

More information

Endogenous Growth Models

Endogenous Growth Models Endogenous Growth Models Lorenza Rossi Goethe University 2011-2012 Endogenous Growth Theory Neoclassical Exogenous Growth Models technological progress is the engine of growth technological improvements

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

The Design and Efficiency of Loyalty Rewards Ramon Caminal This version: October 2010 October 2009

The Design and Efficiency of Loyalty Rewards Ramon Caminal This version: October 2010 October 2009 The Design and Efficiency of Loyalty Rewards Ramon Caminal This version: October 010 October 009 Barcelona GSE Working Paper Series Working Paper nº 408 The design and e ciency of loyalty rewards Ramon

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

Currency and Checking Deposits as Means of Payment

Currency and Checking Deposits as Means of Payment Currency and Checking Deposits as Means of Payment Yiting Li October 2009 Abstract We consider a record keeping cost to distinguish checking deposits from currency in a model where means-of-payment decisions

More information

Topics in Information Economics: Adverse Selection

Topics in Information Economics: Adverse Selection Chapter 3 Topics in Information Economics: Adverse Selection 1. The adverse selection problem.. Akerlof s application to the second-hand car market. 3. Screening: A price discrimination model. 3.1 Introduction

More information

The Role of the Agent s Outside Options in Principal-Agent Relationships

The Role of the Agent s Outside Options in Principal-Agent Relationships The Role of the Agent s Outside Options in Principal-Agent Relationships Imran Rasul Silvia Sonderegger Discussion Paper No. 08/605 Department of Economics University of Bristol 8 Woodland Road Bristol

More information

Chapter 12 - Monopoly

Chapter 12 - Monopoly Chapter 12 - Monopoly Goals: 1. The sources of monopoly power 2. The monopolist s problem 3. Seeking more surplus Part 1: Price Discrimination Part 2: Bundling Goods. Sources of Monopoly Power. Exclusive

More information

Information Gatekeepers on the Internet and the Competitiveness of. Homogeneous Product Markets. By Michael R. Baye and John Morgan 1.

Information Gatekeepers on the Internet and the Competitiveness of. Homogeneous Product Markets. By Michael R. Baye and John Morgan 1. Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets By Michael R. Baye and John Morgan 1 Abstract We examine the equilibrium interaction between a market for

More information

Central Bank Lending and Money Market Discipline

Central Bank Lending and Money Market Discipline Central Bank Lending and Money Market Discipline Marie Hoerova European Central Bank Cyril Monnet FRB Philadelphia November 2010 PRELIMINARY Abstract This paper provides a theory for the joint existence

More information

Paid Placement: Advertising and Search on the Internet

Paid Placement: Advertising and Search on the Internet Paid Placement: Advertising and Search on the Internet Yongmin Chen y Chuan He z August 2006 Abstract Paid placement, where advertisers bid payments to a search engine to have their products appear next

More information

«Internet access and investment incentives for broadband service providers»

«Internet access and investment incentives for broadband service providers» «Internet access and investment incentives for broadband service providers» Edmond BARANES Jean-Christophe POUDOU DR n 2011-09 Internet access and investment incentives for broadband service providers

More information

14.451 Lecture Notes 10

14.451 Lecture Notes 10 14.451 Lecture Notes 1 Guido Lorenzoni Fall 29 1 Continuous time: nite horizon Time goes from to T. Instantaneous payo : f (t; x (t) ; y (t)) ; (the time dependence includes discounting), where x (t) 2

More information

Adverse selection and moral hazard in health insurance.

Adverse selection and moral hazard in health insurance. Adverse selection and moral hazard in health insurance. Franck Bien David Alary University Paris Dauphine November 10, 2006 Abstract In this paper, we want to characterize the optimal health insurance

More information

Equilibrium with Complete Markets

Equilibrium with Complete Markets Equilibrium with Complete Markets Jesús Fernández-Villaverde University of Pennsylvania February 12, 2016 Jesús Fernández-Villaverde (PENN) Equilibrium with Complete Markets February 12, 2016 1 / 24 Arrow-Debreu

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

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

Spot Market Power and Futures Market Trading

Spot Market Power and Futures Market Trading Spot Market Power and Futures Market Trading Alexander Muermann and Stephen H. Shore The Wharton School, University of Pennsylvania March 2005 Abstract When a spot market monopolist participates in the

More information

Ans homework 5 EE 311

Ans homework 5 EE 311 Ans homework 5 EE 311 1. Suppose that Intel has a monopoly in the market for microprocessors in Brazil. During the year 2005, it faces a market demand curve given by P = 9 - Q, where Q is millions of microprocessors

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

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

February 2013. Abstract

February 2013. Abstract Marking to Market and Ine cient Investments Clemens A. Otto and Paolo F. Volpin February 03 Abstract We examine how mark-to-market accounting a ects investment decisions in an agency model with reputation

More information

The E ect of Trading Commissions on Analysts Forecast Bias

The E ect of Trading Commissions on Analysts Forecast Bias The E ect of Trading Commissions on Analysts Forecast Bias Anne Beyer and Ilan Guttman Stanford University September 2007 Abstract The paper models the interaction between a sell-side analyst and a risk-averse

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

Module 7: Debt Contracts & Credit Rationing

Module 7: Debt Contracts & Credit Rationing Module 7: Debt Contracts & Credit ationing Information Economics (Ec 515) George Georgiadis Two Applications of the principal-agent model to credit markets An entrepreneur (E - borrower) has a project.

More information

Asymmetric Information (2)

Asymmetric Information (2) Asymmetric nformation (2) John Y. Campbell Ec2723 November 2013 John Y. Campbell (Ec2723) Asymmetric nformation (2) November 2013 1 / 24 Outline Market microstructure The study of trading costs Bid-ask

More information

Federal Reserve Bank of New York Staff Reports

Federal Reserve Bank of New York Staff Reports Federal Reserve Bank of New York Staff Reports Monetary Policy Implementation Frameworks: A Comparative Analysis Antoine Martin Cyril Monnet Staff Report no. 313 January 2008 Revised October 2009 This

More information

Working Paper Pricing Internet Traffic: Exclusion, Signalling and Screening

Working Paper Pricing Internet Traffic: Exclusion, Signalling and Screening econstor www.econstor.eu Der Open-Access-Publikationsserver der ZBW Leibniz-Informationszentrum Wirtschaft The Open Access Publication Server of the ZBW Leibniz Information Centre for Economics Jullien,

More information

1 Present and Future Value

1 Present and Future Value Lecture 8: Asset Markets c 2009 Je rey A. Miron Outline:. Present and Future Value 2. Bonds 3. Taxes 4. Applications Present and Future Value In the discussion of the two-period model with borrowing and

More information

Discussion of Self-ful lling Fire Sales: Fragility of Collateralised, Short-Term, Debt Markets, by J. C.-F. Kuong

Discussion of Self-ful lling Fire Sales: Fragility of Collateralised, Short-Term, Debt Markets, by J. C.-F. Kuong Discussion of Self-ful lling Fire Sales: Fragility of Collateralised, Short-Term, Debt Markets, by J. C.-F. Kuong 10 July 2015 Coordination games Schelling (1960). Bryant (1980), Diamond and Dybvig (1983)

More information

Oligopoly and Trade. Notes for Oxford M.Phil. International Trade. J. Peter Neary. University of Oxford. November 26, 2009

Oligopoly and Trade. Notes for Oxford M.Phil. International Trade. J. Peter Neary. University of Oxford. November 26, 2009 Oligopoly and Trade Notes for Oxford M.Phil. International Trade J. Peter Neary University of Oxford November 26, 2009 J.P. Neary (University of Oxford) Oligopoly and Trade November 26, 2009 1 / 11 Oligopoly

More information

Monopoly WHY MONOPOLIES ARISE

Monopoly WHY MONOPOLIES ARISE In this chapter, look for the answers to these questions: Why do monopolies arise? Why is MR < P for a monopolist? How do monopolies choose their P and Q? How do monopolies affect society s well-being?

More information

Partial Fractions Decomposition

Partial Fractions Decomposition Partial Fractions Decomposition Dr. Philippe B. Laval Kennesaw State University August 6, 008 Abstract This handout describes partial fractions decomposition and how it can be used when integrating rational

More information

Chapter 12: more on monopoly pricing

Chapter 12: more on monopoly pricing Chapter 12: more on monopoly pricing 1 Motivation for price discrimination: 2 Types of price discrimination First-degree: the firm is aware of each individual buyer s demand curve ==> relate to consumer

More information

Exploiting Externalities: Facebook versus Users, Advertisers and Application Developers

Exploiting Externalities: Facebook versus Users, Advertisers and Application Developers Exploiting Externalities: Facebook versus Users, Advertisers and Application Developers Ernie G.S. Teo and Hongyu Chen y Division of Economics, Nanyang Technological University, Singapore March 9, 202

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

2. Suppose two Cournot duopolist rms operate at zero marginal cost. The market demand is p = a bq. Firm 1 s best-response function is

2. Suppose two Cournot duopolist rms operate at zero marginal cost. The market demand is p = a bq. Firm 1 s best-response function is Econ301 (summer 2007) Quiz 1 Date: Jul 5 07 Instructor: Helen Yang PART I: Multiple Choice (5 points each, 75 points in total) 1. In the long run, a monopolistically competitive rm (a) operates at full

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

A Welfare Criterion for Models with Distorted Beliefs

A Welfare Criterion for Models with Distorted Beliefs A Welfare Criterion for Models with Distorted Beliefs Markus Brunnermeier, Alp Simsek, Wei Xiong August 2012 Markus Brunnermeier, Alp Simsek, Wei Xiong () Welfare Criterion for Distorted Beliefs August

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

Games Played in a Contracting Environment

Games Played in a Contracting Environment Games Played in a Contracting Environment V. Bhaskar Department of Economics University College London Gower Street London WC1 6BT February 2008 Abstract We analyze normal form games where a player has

More information

Industrial Organization: Markets and Strategies

Industrial Organization: Markets and Strategies Industrial Organization: Markets and Strategies PART IV. Pricing strategies and market segmentation Paul Belle amme Université catholique de Louvain Martin Peitz Universität Mannheim Under contract with

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

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

Unit 7. Firm behaviour and market structure: monopoly

Unit 7. Firm behaviour and market structure: monopoly Unit 7. Firm behaviour and market structure: monopoly Learning objectives: to identify and examine the sources of monopoly power; to understand the relationship between a monopolist s demand curve and

More information

Linear Programming Notes V Problem Transformations

Linear Programming Notes V Problem Transformations Linear Programming Notes V Problem Transformations 1 Introduction Any linear programming problem can be rewritten in either of two standard forms. In the first form, the objective is to maximize, the material

More information

4. Only one asset that can be used for production, and is available in xed supply in the aggregate (call it land).

4. Only one asset that can be used for production, and is available in xed supply in the aggregate (call it land). Chapter 3 Credit and Business Cycles Here I present a model of the interaction between credit and business cycles. In representative agent models, remember, no lending takes place! The literature on the

More information

An example of externalities - the multiplicative case

An example of externalities - the multiplicative case An example of externalities - the multiplicative case Yossi Spiegel Consider an exchange economy with two agents, A and B, who consume two goods, x and y. This economy however, differs from the usual exchange

More information

INTRODUCTORY MICROECONOMICS Instructor: Filip Vesely 12

INTRODUCTORY MICROECONOMICS Instructor: Filip Vesely 12 INTRODUCTORY MICROECONOMICS Instructor: Filip Vesely 12 MIDTERM EXAM will be on March 29 Everything you earn and many things you buy are taxed. Who really pays these taxes? Tax Incidence is the division

More information

Next Tuesday: Amit Gandhi guest lecture on empirical work on auctions Next Wednesday: first problem set due

Next Tuesday: Amit Gandhi guest lecture on empirical work on auctions Next Wednesday: first problem set due Econ 805 Advanced Micro Theory I Dan Quint Fall 2007 Lecture 6 Sept 25 2007 Next Tuesday: Amit Gandhi guest lecture on empirical work on auctions Next Wednesday: first problem set due Today: the price-discriminating

More information

Frequent flyer programs and dynamic contracting with limited commitment

Frequent flyer programs and dynamic contracting with limited commitment Frequent flyer programs and dynamic contracting with limited commitment Emil Temnyalov March 14, 2015 Abstract I present a novel contract theoretic explanation of the profitability and management of loyalty

More information

ECF1100 Microeconomics

ECF1100 Microeconomics ECF1100 Microeconomics Semester 2, 2015 Notes Textbook: Gans, King, Byford and Mankiw, Principles of Microeconomics 6th Edition, Cengage Learning, Copyright 2015 (ISBN 9780170248525). Contents Week 1 Introduction

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. Chapter 11 Monopoly practice Davidson spring2007 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly industry is characterized by 1) A)

More information

Summary Chapter 12 Monopoly

Summary Chapter 12 Monopoly Summary Chapter 12 Monopoly Defining Monopoly - A monopoly is a market structure in which a single seller of a product with no close substitutes serves the entire market - One practical measure for deciding

More information

WELFARE ENHANCING COORDINATION IN CONSUMER COOPERATIVES UNDER MIXED OLIGOPOLY. WP-EMS Working Papers Series in Economics, Mathematics and Statistics

WELFARE ENHANCING COORDINATION IN CONSUMER COOPERATIVES UNDER MIXED OLIGOPOLY. WP-EMS Working Papers Series in Economics, Mathematics and Statistics ISSN 1974-4110 (on line edition) ISSN 1594-7645 (print edition) WP-EMS Working Papers Series in Economics, Mathematics and Statistics WELFARE ENHANCING COORDINATION IN CONSUMER COOPERATIVES UNDER MIXED

More information

SUPPLY AND DEMAND : HOW MARKETS WORK

SUPPLY AND DEMAND : HOW MARKETS WORK SUPPLY AND DEMAND : HOW MARKETS WORK Chapter 4 : The Market Forces of and and demand are the two words that economists use most often. and demand are the forces that make market economies work. Modern

More information

Quality differentiation and entry choice between online and offline markets

Quality differentiation and entry choice between online and offline markets Quality differentiation and entry choice between online and offline markets Yijuan Chen Australian National University Xiangting u Renmin University of China Sanxi Li Renmin University of China ANU Working

More information

Chapter 1: The Modigliani-Miller Propositions, Taxes and Bankruptcy Costs

Chapter 1: The Modigliani-Miller Propositions, Taxes and Bankruptcy Costs Chapter 1: The Modigliani-Miller Propositions, Taxes and Bankruptcy Costs Corporate Finance - MSc in Finance (BGSE) Albert Banal-Estañol Universitat Pompeu Fabra and Barcelona GSE Albert Banal-Estañol

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

chapter >> Consumer and Producer Surplus Section 3: Consumer Surplus, Producer Surplus, and the Gains from Trade

chapter >> Consumer and Producer Surplus Section 3: Consumer Surplus, Producer Surplus, and the Gains from Trade chapter 6 >> Consumer and Producer Surplus Section 3: Consumer Surplus, Producer Surplus, and the Gains from Trade One of the nine core principles of economics we introduced in Chapter 1 is that markets

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

Universities as Stakeholders in their Students Careers: On the Benefits of Graduate Taxes to Finance Higher Education

Universities as Stakeholders in their Students Careers: On the Benefits of Graduate Taxes to Finance Higher Education D I S C U S S I O N P A P E R S E R I E S IZA DP No. 5330 Universities as Stakeholders in their Students Careers: On the Benefits of Graduate Taxes to Finance Higher Education Tom McKenzie Dirk Sliwka

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

Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay. Lecture - 13 Consumer Behaviour (Contd )

Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay. Lecture - 13 Consumer Behaviour (Contd ) (Refer Slide Time: 00:28) Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay Lecture - 13 Consumer Behaviour (Contd ) We will continue our discussion

More information

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

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. Principles of Microeconomics Fall 2007, Quiz #6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. 1) A monopoly is

More information

1 Maximizing pro ts when marginal costs are increasing

1 Maximizing pro ts when marginal costs are increasing BEE12 Basic Mathematical Economics Week 1, Lecture Tuesda 12.1. Pro t maimization 1 Maimizing pro ts when marginal costs are increasing We consider in this section a rm in a perfectl competitive market

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

Online shopping and platform design with ex ante registration requirements

Online shopping and platform design with ex ante registration requirements Online shopping and platform design with ex ante registration requirements Florian Morath Johannes Münster y December 5, 2014 Abstract We study platform design in online markets in which buying involves

More information

Why variable inventory costs intensify retail competition, and a case for manufacturer returns

Why variable inventory costs intensify retail competition, and a case for manufacturer returns Why variable inventory costs intensify retail competition, and a case for manufacturer returns Abstract We study how the extent to which the inventory cost is sunk or remains variable a ects retail competition

More information

Do capital adequacy requirements reduce risks in banking?

Do capital adequacy requirements reduce risks in banking? Journal of Banking & Finance 23 (1999) 755±771 Do capital adequacy requirements reduce risks in banking? Jurg Blum * Institut zur Erforschung der wirtschaftlichen Entwicklung, University of Freiburg, D-79085

More information

Can a Lump-Sum Transfer Make Everyone Enjoy the Gains. from Free Trade?

Can a Lump-Sum Transfer Make Everyone Enjoy the Gains. from Free Trade? Can a Lump-Sum Transfer Make Everyone Enjoy te Gains from Free Trade? Yasukazu Icino Department of Economics, Konan University June 30, 2010 Abstract I examine lump-sum transfer rules to redistribute te

More information

Buying shares and/or votes for corporate control

Buying shares and/or votes for corporate control Buying shares and/or votes for corporate control Eddie Dekel and Asher Wolinsky 1 July 2010 1 Dekel is at the Department of Economics, Tel Aviv University and Northwestern University, Evanston, IL 60208,

More information