Industrial Organization Lecture 4: Discrimination
|
|
- Betty Carson
- 7 years ago
- Views:
Transcription
1 Industrial Organization Lecture 4: Discrimination Marie-Laure Allain Ecole Polytechnique January 14, 2015 Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
2 Introduction So far, we have assumed that prices were uniform : unit price, for perfect competition as well as for monopolies / oligopolies One good = one price All consumers pay the same price, irrespective of their valuation (ex: rationing) In practice, different units of a same good can be sold at different prices to the same customer or to different ones: discrimination Example: Different classes (airlines) or packages - different prices for different services Different prices for the same class too: plane tickets prices depends on many factors (when you buy the ticket, flexibility, etc.). Quantity rebates ( the second half price : same product sold at different prices for the same consumer), fidelity rebates Supermarket chains charge higher prices in richer areas. Special prices for young, retirees, large families Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
3 Introduction Debate on price discrimination: law versus economics Law: discrimination has a negative flavour: does not seem fair a priori Contrast with universal service for telecoms, postal services, electricity Reflecting cost difference is not discriminatory (e.g. delivered prices p + tx) Economics: discrimination = personalisation Other things equal, A firm benefits from offering tailored prices Customers: some win, some lose, and the overall effect is ambiguous (efficiency / redistribution) Strategic interaction: discrimination can increase competition Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
4 Introduction Three types of discrimination (Pigou, 1920) First degree price discrimination: perfect discrimination A specific price for each unit (for the same or different customers): p ih (q ih ) or T i (q i ). Scond degree price discrimination: self-selection Same menu for all customers, with options tailored to specific needs {p i, q i } i or T (q) (example: two-part tariffs) Third degree price discrimination: based on observable characteristics Age, location, family, etc: a tariff for each group (movie theater, railway services, etc.): {p g } g (example: discount for students) Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
5 Price discrimination: outline First degree discrimination Third degree discrimination Second degree discrimination Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
6 First degree price discrimination Perfect discrimination : Supposes perfect information about customers Different prices for different customers Different prices for different units sold to same customer (not very realistic, but useful benchmark) Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
7 First degree price discrimination Example: consider a monopoly Consumer willing to pay u i for i th unit Constant unit cost c Benchmark: no discrimination Uniform price p Trade-off markup / volume : (p c) p = 1 ε Monopoly: p > c inefficient as W < W Welfare is not maximal, but it is shared between firm and consumers. Cf next figure: due to uniform pricing, consumers with high valuation have a positive surplus. Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
8 First degree price discrimination No discrimination: welfare is shared. P Consumers surplus Monopoly profit «Dead weight loss» (welfare loss) p c = c q c q Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
9 First degree price discrimination Assume perfect dicrimination is possible: Maximal price for each unit: p i = u i All units such that u i > c are traded Trade is efficient: W = W But consumer surplus is zero: the whole welfare is seized by the firm. Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
10 First degree price discrimination Discrimination: welfare is maximal, but seized by the monopoly. P Monopoly profit = welfare p c = c q c q Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
11 First degree price discrimination Remark: implementation Quantity q Utility: U(q), U 0, U 0 Production cost C(q) Efficient trade: q : max q U(q) C(q) U (q ) = C (q )(= p ) Nonlinear tariff T (q) = U(q) Or two-part tariff: T (q) = S(p ) + p q ( sell the technology ) Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
12 Price discrimination: outline First degree discrimination Third degree discrimination Second degree discrimination Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
13 Third degree price discrimination Supposes limited information about customers Identify customer segment More realistic: necessitates accessible information, e.g. student card, ID card (age), etc. In practice, sellers have to prevent arbitrage from buyers who would buy on the cheapest segment to resell to the high-price segment. Prevent distributors from selling actively outside their territories, and limit exports: quotas, dual pricing for domestic/exports (medicines), etc. Example of country-based prices: cars, pharmaceutical products Easier to prevent arbitrage for services (resell a meal at a restaurant?) Guarantees become void if sale outside country of origin Assumes also that the firms cannot discriminate within a group. Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
14 Third degree price discrimination Example Framework A monopolist faces a constant unit cost c n consumers groups, demand for each group D i (p), i {1,..., n} No discrimination (refresher): price p for aggregate demand D = Di i Optimal pricing: p c = 1 p ε(p) with ε(p) = D (p)p D(p) the elasticity of demand on total market. Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
15 Third degree price discrimination Example (contd) Discrimination: the monopolist maximizes its profit p i D i (p i ) c i i D i (p i ) yields the price p i for group i: p i c p i = 1 ε i (p i ) where ε i (p i ) = D i (p i )p i D i (p i ) is the elasticity of demand on market i. Note that ε(p) = D i (p) D(p) ε i(p i ). i Optimal pricing implies that the monopolist should charge more in markets with the lower elasticity of demand. Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
16 Third degree price discrimination Welfare analysis: property For a given total output, not discriminating is more efficient: n n max U i (q i ) C(Q) st. q i = Q i=1 i=1 U i (q i ) = p : FOC yield i {1,..., n 1}, U i (q i) = U 1 (q 1). By definition of the demand function, p = U 1 (q 1). Price differences thus yield inefficient outcomes: U i (qi) = pi Implication: discrimination can increase total surplus only if it increases volume of trade Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
17 Third degree price discrimination Illustration Two markets, sizes N 1 and N 2, reservation prices v 1 and v 2 > v 1 Discrimination: p i = v i No discrimination: the firm can Either serve all consumers at price p 1 = v 1 : yields a profit π 1 = (N 1 + N 2 )(v 1 c); Or serve only market 2 at price p 2 = v 2 : yields a profit π 2 = N 2 (v 2 c). p p v 2 π 1 v 2 π 2 v 1 v 1 c c q q Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
18 Third degree price discrimination if π 1 > π 2, first option prevails; then forbidding discrimination: Does not affect total surplus; But benefits consumers in the second market. If instead π 1 < π 2, forbidding discrimination: Leads firm to withdraw from first market; Total surplus decreases: no consumer benefits and the firm loses. Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
19 Third degree price discrimination Impact on competition? Discrimination tends to intensify competition: No discrimination: average sensitivity of residual demand Discrimination: more direct competition for each group Illustration: spatial differentiation à la Hotelling Two firms 1 and 2, located at the two ends of a street of length L Same constant unit cost c. Unit transportation cost t Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
20 Third degree price discrimination Benchmark: No discrimination - price free on board p i A consumer located at distance x from firm i(j i) will buy from i if: p i + tx < p j + t(l x) Demands thus are: D 1 = L 2 (p 2 p 1 ) 2t and D 2 = L D 1 Maximizing profit π i = (p i c)d i yields the best-response p i = tl+c+p j 2, hence the equilibrium prices: p 1 = p 2 = c + tl Consumer x thus buys from the closer shop and pays Lt + c + tmin{x, L x} Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
21 Third degree price discrimination Discrimination: delivered price p i (x) Actually, the good is not necessarily delivered, but the transport cost is subsidized by the firm. Homogenous good (delivered to same address), consumer x compares the two prices: similar to Bertrand competition; But the cost of delivery is not the same: c + tx for firm 1 and c + t(l x) for firm 2. As in Bertrand with asymmetric costs, the closer firm wins at price just below its competitor s price: Consumer x thus buys from the closer shop and pays Lt + c tmin{x, L x} Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
22 Third degree price discrimination c + 3Lt 2 without discrimina-on c + Lt c c + Lt 2 with discrimina-on 0 L 2 L Figure : Prices paid by consumers. Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
23 Third degree price discrimination Conclusion: total prices are lower when firms compete in personalized delivered prices Remark: Firms are better off absent discrimination But each firm benefits from offering personalized prices Asymmetric regulation A unilateral move to discrimination can intensify competition Illustration: meeting competition defence for dominant firm Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
24 Price discrimination: outline First degree discrimination Third degree discrimination Second degree discrimination Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
25 Second degree price discrimination Firm Does not identify consumer type Can still discriminate by offering a menu of options Different customers choose different packages: Price, quantity, quality, services Each customer has more information about its preferences than the firm Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
26 Second degree price discrimination Tariff-based discrimination (quantity dimension): e.g. menu of two-part tariffs yields a concave, non-linear tariff (progressive rebate) T 1 (q) = F 1 +p 1 q T 0 (q) = p 0 q T 2 (q) = F 2 +p 2 q T(q) Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
27 Example Second degree price discrimination Consumers, gross surplus: U = θu(q) with u > 0 and u < 0. θ is the intensity of preference With two part tariff T = pq + F, Consumer s variable surplus is S(p, θ) = θu(q) pq Consumer s utility is θu(q) T (Inverse) demand is defined by q = D(p, θ) p = θu (q). Benchmark: perfect discrimination (personalized tariffs) Consumer θ s variable surplus is maximum for p = c: defines q such that S (c, θ) = θu(q ) cq The optimal tariff for consumer θ is T (q, θ) = S (c, θ) + }{{} cq }{{} fixed part variable part The firm then seizes the whole surplus of consumer θ at its maximum: π = T (q, θ) cq = S (c, θ). What if tariff must be the same for all consumers? Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
28 Second degree price discrimination Uniform tariff: simplified model Assume two types of consumers: low with θ 1 and high θ 2 > θ 1, in proportions λ 1 and λ 2. With two part tariff T = pq + F, Utility normalized to zero for outside option not buying Optimal two-part tariff Maximize λ 1 [F + (p c)d(p, θ 1 )] + λ 2 [F + (p c)d(p, θ 2 )] Subject to participation constraint: F S(p, θ 1 )( S(p, θ 2 )). Yields F = S(p, θ 1 ) with p maximizing λ 1 [S(p, θ 1 ) + (p c)d(p, θ 1 )] + λ 2 [S(p, θ 1 ) + (p c)d(p, θ 2 )] = W (p, θ 1 ) + λ 2 (p c) [D(p, θ 2 ) D(p, θ 1 )] }{{} >0 Without the second term, the firm would choose efficient price p = c; The second term drives the price above marginal cost: p > c; However, since it recovers some surplus through fixed fee, p < p m (θ 2 ). Profit is however less than with perfect discrimination. Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
29 Second degree price discrimination A non-linear tariff can do better: offer two options (t 1, q 1 ) and (t 2, q 2 ) so as to max λ 1(t 1 cq 1 ) + λ 2 (t 2 cq 2 ) (q 1,t 1 ),(q 2,t 2 ) s.t.θ 1 u(q 1 ) t 1 0 (PC 1 ) θ 2 u(q 2 ) t 2 0 (PC 2 ) θ 1 u(q 1 ) t 1 θ 1 u(q 2 ) t 2 (IC 1 ) θ 2 u(q 2 ) t 2 θ 2 u(q 1 ) t 1 (IC 2 ) (PC i ) are consumer i s participation constraint: higher utility if they accept their offer than no offer; (IC i ) are consumer i s incentive constraint: higher utility if they accept their offer than the offer designed for the other type of customers; Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
30 Second degree price discrimination IC constraints ensure self-selection of the customers: the main idea behind second-degree price discrimination. Remark: revealed preferences argument: incentive constraints can be rewritten as θ 2 [u(q 2 ) u(q 1 )] t 2 t 1 θ 1 [u(q 2 ) u(q 1 )] which implies that q 2 q 1 (as 0 < θ 1 < θ 2 ). Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
31 Second degree price discrimination The participation constraint of consumers of type 1 is thus The more restrictive of the two participation constraints (as θ 1 u(q 1 ) θ 2 u(q 2 )); Necessarily binding (otherwise, could uniformly increase both tariffs): implies t 1 = θ 1 u(q 1 ). Furthermore, the more restrictive incentive constraint is that of type 2 ( high ) consumers: Assume (IC 2 ) is binding: then t 2 t 1 = θ 2 [u(q 2 ) u(q 1 )] (IC 1 ) is satisfied too: t 2 t 1 θ 1 [u(q 2 ) u(q 1 )] Yet (IC 2 ) must be binding, otherwise can increase both tariffs; Implies t 2 = θ 2 u(q 2 ) (θ 2 θ 1 )u(q 1 ). Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
32 Second degree price discrimination A firm can thus Implement any profile q 2 q 1 At the maximal prices t 1 = θ 1 u(q 1 ) t 2 = θ 2 u(q 2 ) (θ 2 θ 1 )u(q 1 ). The programme of the firm thus amounts to max λ 1[θ 1 u(q 1 ) cq 1 ] + λ 2 [θ 2 u(q 2 ) (θ 2 θ 1 )u(q 1 ) cq 2 ] (q 1,q 2 ) = λ 1 [θ 1 u(q 1 ) λ 2 λ 1 (θ 2 θ 1 )u(q 1 ) cq 1 ] + λ 2 [θ 2 u(q 2 ) cq 2 ] Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
33 Second degree price discrimination The previous program yields the FOC: FOC q1 : [θ 1 λ 2 λ 1 (θ 2 θ 1 )]u (q 1 ) = c FOC q2 : θ 2 u (q 2 ) = c For large consumers: efficient quantity θ 2 u (q 2 ) = c For small consumers: quantity is lower than efficient level: [θ 1 λ 2 λ 1 (θ 2 θ 1 )]u (q 1 ) = c The solution is such that q 2 > q 1 Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
34 Second degree price discrimination Intuition: reducing quantity offered to small consumers Relaxes large users incentive constraint Allows the firm to extract more surplus from them Remark: The optimal menu differs from the one obtained with single two-part tariff Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
35 Second degree price discrimination More general model: continuum of consumers θ distributed over [θ 1, θ 2 ] according to density f (θ) and cumulative distribution function F (θ). Intuitively, consumer is excluded if θ is close to 0 let ˆθ denote the (endogenous) threshold characterizing the first consumer served. The programme of the firm becomes: + max q(.),t(.) ˆθ [t(θ) cq(θ)]f (θ)dθ s.t. θ, θu(q(θ)) t(θ) 0 (P θ ) θu(q(θ)) t(θ) θu(q(θ )) t(θ ) θ (I θ ) Note: as before, the incentive constraints imply that the quantity must increase with θ. Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
36 Second degree price discrimination Defining the rent left to the consumer r θu t, we rewrite the programme as: max q(.),t(.) + ˆθ [θu(q(θ)) cq(θ) r(θ)]f (θ)dθ s.t. θ, r(θ) 0 (P θ ) r(θ) r(θ ) + (θ θ )u(q(θ )) θ (I θ ) The incentive constraint moreover implies r (θ) = d [θu(q(θ)) t(θ)] dθ = d dθ [max θ {θu(q(θ )) t(θ )}] = u(q(θ)) > 0 (using the envelope theorem) The rent r thus increases in θ: the binding participation constraint is that of ˆθ: r(ˆθ) = 0. Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
37 Second degree price discrimination The rent can thus be rewritten as r(θ) = θ ˆθ r (x)dx = θ ˆθ u(q(x))dx Any increasing quantity profile q(θ) together with the rent profile r(θ) = θˆθ u(q(x))dx can be implemented using the non linear tariff t(θ) = θu(q(θ)) r(θ): Consider the incentive constraint I θ. The rent of a consumer of type θ who would choose a contract designed for a θ would be: V (θ, θ ) = θu(q(θ )) t(θ ) = (θ θ )u(q(θ )) + r(θ ) = (θ θ )u(q(θ )) + θ ˆθ u(q(x))dx Thus dv dθ = (θ θ )u (q(θ ))q (θ ) is positive if θ < θ and negative if θ > θ: consumer θ thus chooses the right contract (θ = θ). Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
38 Second degree price discrimination The expected rent over all consumers is thus equal to + ˆθ r(θ)f (θ)dθ = (integration by parts) = = + θ ˆθ [ ˆθ + + ˆθ + ˆθ [ θ u(q(x))dx]f (θ)dθ f (x)dx]u(q(θ))dθ [1 F (θ)]u(q(θ))dθ. Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
39 Second degree price discrimination The objective of the firms can thus be rewritten as max q(.) + ˆθ max q(.) {[θu(q(θ)) cq(θ)]f (θ) [1 F (θ)]u(q(θ))}dθ + ˆθ [(θ 1 F (θ) f (θ) 1 F (θ) f (θ) s.t. θ, q (θ) 0 )u(q(θ)) cq(θ)]f (θ)dθ Assuming that h(θ) θ increases with θ, the solution is implicitely given by maximizing over q(.) inside the integral: h(θ)u (q) = c. As h(θ) < θ, the quantity is below the efficient level. Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
40 Second degree price discrimination The total price paid by the consumer θ is t(θ) = θu(q(θ)) r(θ) Can be implemented via a non-linear tariff t = T (q), such that t(θ) = T (q(θ)) The marginal price T (q) satisfies T (q (θ)) = θu (q (θ)) = c + l(θ)u (q (θ)) where l(θ) 1 F (θ) f (θ) represents the likelihood ratio. Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
41 Second degree price discrimination When the likelihood ratio decreases with θ (as is the case for most usual distributions): The marginal price T (q) decreases with θ (since l(θ) decrease, and u < 0), The non-linear tariff T (q) is therefore concave Marie-Laure Allain (Ecole Polytechnique) IO 4: Discrimination January 14, / 41
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 information3 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 informationLecture 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 informationChapter 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 informationPart 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 informationSustainable 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 informationPrice 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 informationSECOND-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 information1. 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 informationMonopoly: 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 informationSecond 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 information2.2 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 informationExercises 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 informationEcon 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 information2. 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 informationA 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 informationOligopoly: 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 information1.4 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 informationAll 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 informationMULTIPLE 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 informationPrice 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 informationOligopoly 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 informationProblem 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 informationFigure 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 information2.4 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 informationProduct Differentiation In homogeneous goods markets, price competition leads to perfectly competitive outcome, even with two firms Price competition
Product Differentiation In homogeneous goods markets, price competition leads to perfectly competitive outcome, even with two firms Price competition with differentiated products Models where differentiation
More informationPrice 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 informationMICROECONOMICS 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 informationHORIZONTAL MERGERS Advanced Industrial Organization 1
HORIZONTAL MERGERS Advanced Industrial Organization 1 THIBAUD VERGÉ CREST-LEI ENSAE 3A / Master APE (2009-2010) THIBAUD VERGÉ ( CREST-LEI ) Horizontal Mergers Advanced IO 1 1 / 42 Outline Introduction
More informationAnswers 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 informationMULTIPLE 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 informationManagerial Economics. 1 is the application of Economic theory to managerial practice.
Managerial Economics 1 is the application of Economic theory to managerial practice. 1. Economic Management 2. Managerial Economics 3. Economic Practice 4. Managerial Theory 2 Managerial Economics relates
More informationCapital Structure. Itay Goldstein. Wharton School, University of Pennsylvania
Capital Structure Itay Goldstein Wharton School, University of Pennsylvania 1 Debt and Equity There are two main types of financing: debt and equity. Consider a two-period world with dates 0 and 1. At
More informationMonopoly 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 informationExam 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 informationLecture 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 informationECON 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 informationPart 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 informationAdvertising. 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 informationMonopolistic Competition
In this chapter, look for the answers to these questions: How is similar to perfect? How is it similar to monopoly? How do ally competitive firms choose price and? Do they earn economic profit? In what
More informationMarket Structure: Perfect Competition and Monopoly
WSG8 7/7/03 4:34 PM Page 113 8 Market Structure: Perfect Competition and Monopoly OVERVIEW One of the most important decisions made by a manager is how to price the firm s product. If the firm is a profit
More informationMonopoly 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 informationp, 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 informationSolution 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 informationFrequent 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 informationForeclosure, Entry, and Competition in Platform Markets with Cloud
Foreclosure, Entry, and Competition in Platform Markets with Cloud Mark J. Tremblay Department of Economics Michigan State University E-mail: trembl22@msu.edu August 27, 2015 Abstract Platforms in two-sided
More informationECON 312: Oligopolisitic Competition 1. Industrial Organization Oligopolistic Competition
ECON 312: Oligopolisitic Competition 1 Industrial Organization Oligopolistic Competition Both the monopoly and the perfectly competitive market structure has in common is that neither has to concern itself
More informationCommon in European countries government runs telephone, water, electric companies.
Public ownership Common in European countries government runs telephone, water, electric companies. US: Postal service. Because delivery of mail seems to be natural monopoly. Private ownership incentive
More informationCHAPTER 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 informationTRADE WITH SCALE ECONOMIES AND IMPERFECT COMPETITION (CONT'D)
ECO 352 Spring 2010 No. 14 Mar. 25 OLIGOPOLY TRADE WITH SCALE ECONOMIES AND IMPERFECT COMPETITION (CONT'D) Example using numbers from Precept Week 7 slides, pp. 2, 3. Ingredients: Industry with inverse
More informationADVANCED 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 informationConditions 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 information9.1 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 informationCHAPTER 6 MARKET STRUCTURE
CHAPTER 6 MARKET STRUCTURE CHAPTER SUMMARY This chapter presents an economic analysis of market structure. It starts with perfect competition as a benchmark. Potential barriers to entry, that might limit
More informationKEELE 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 informationMonopoly. 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 informationEconomics 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 informationChapter 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 informationMonopoly Quantity & Price Elasticity Welfare. Monopoly Chapter 24
Monopol monopl.gif (GIF Image, 289x289 pixels) Chapter 24 http://i4.photobu Motivating Questions What price and quantit does a monopol choose? What are the welfare effects of monopol? What are the effects
More informationPrice 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 informationPricing 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 informationCournot s model of oligopoly
Cournot s model of oligopoly Single good produced by n firms Cost to firm i of producing q i units: C i (q i ), where C i is nonnegative and increasing If firms total output is Q then market price is P(Q),
More informationMobile Number Portability
Mobile Number Portability Stefan Buehler University of Zurich and University of St. Gallen Justus Haucap University of the Federal Armed Forces Hamburg March 2003 Abstract This paper examines the competitive
More informationFinal 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 informationManagerial 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 informationThe 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 informationPure Competition urely competitive markets are used as the benchmark to evaluate market
R. Larry Reynolds Pure Competition urely competitive markets are used as the benchmark to evaluate market P performance. It is generally believed that market structure influences the behavior and performance
More informationPrice 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 informationChapter 14 Monopoly. 14.1 Monopoly and How It Arises
Chapter 14 Monopoly 14.1 Monopoly and How It Arises 1) One of the requirements for a monopoly is that A) products are high priced. B) there are several close substitutes for the product. C) there is a
More informationOligopoly 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 informationChapter 7 Monopoly, Oligopoly and Strategy
Chapter 7 Monopoly, Oligopoly and Strategy After reading Chapter 7, MONOPOLY, OLIGOPOLY AND STRATEGY, you should be able to: Define the characteristics of Monopoly and Oligopoly, and explain why the are
More informationOn 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 informationA Strategic Guide on Two-Sided Markets Applied to the ISP Market
A Strategic Guide on Two-Sided Markets Applied to the ISP Market Thomas CORTADE LASER-CREDEN, University of Montpellier Abstract: This paper looks at a new body of literature that deals with two-sided
More informationPrice 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 informationMaximising Consumer Surplus and Producer Surplus: How do airlines and mobile companies do it?
Maximising onsumer Surplus and Producer Surplus: How do airlines and mobile companies do it? This is a topic that has many powerful applications in understanding economic policy applications: (a) the impact
More informationEfficient 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 informationCHAPTER 12 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 2 nd Edition
CHAPTER 12 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 2 nd Edition Chapter Summary Now that you understand the model of a perfectly competitive market, this chapter complicates
More informationECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS
ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of June 23 Chapter 8 WRITE [4] Use the demand schedule that follows to calculate total revenue and marginal revenue at each quantity. Plot
More informationImperfect information Up to now, consider only firms and consumers who are perfectly informed about market conditions: 1. prices, range of products
Imperfect information Up to now, consider only firms and consumers who are perfectly informed about market conditions: 1. prices, range of products available 2. characteristics or relative qualities of
More informationChapter 9 Basic Oligopoly Models
Managerial Economics & Business Strategy Chapter 9 Basic Oligopoly Models McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved. Overview I. Conditions for Oligopoly?
More informationManagerial 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 informationFirst 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 informationPricing in a Competitive Market with a Common Network Resource
Pricing in a Competitive Market with a Common Network Resource Daniel McFadden Department of Economics, University of California, Berkeley April 8, 2002 I. This note is concerned with the economics of
More informationManagerial Economics & Business Strategy Chapter 9. Basic Oligopoly Models
Managerial Economics & Business Strategy Chapter 9 Basic Oligopoly Models Overview I. Conditions for Oligopoly? II. Role of Strategic Interdependence III. Profit Maximization in Four Oligopoly Settings
More informationECON 459 Game Theory. Lecture Notes Auctions. Luca Anderlini Spring 2015
ECON 459 Game Theory Lecture Notes Auctions Luca Anderlini Spring 2015 These notes have been used before. If you can still spot any errors or have any suggestions for improvement, please let me know. 1
More informationLecture 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 informationEconomics Chapter 7 Review
Name: Class: Date: ID: A Economics Chapter 7 Review Matching a. perfect competition e. imperfect competition b. efficiency f. price and output c. start-up costs g. technological barrier d. commodity h.
More informationTerry College of Business - ECON 7950
Terry College of Business - ECON 7950 Lecture 9: Product Differentiation Primary reference: McAfee, Competitive Solutions, Ch. 4 Differentiated Products When products are differentiated, competition does
More informationPlatform Competition under Asymmetric Information
Platform Competition under Asymmetric Information Hanna Hałaburda Yaron Yehezkel Working Paper 11-080 Copyright 2011 by Hanna Hałaburda and Yaron Yehezkel Working papers are in draft form. This working
More informationWhy 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 informationChapter 14 Monopoly. 14.1 Monopoly and How It Arises
Chapter 14 Monopoly 14.1 Monopoly and How It Arises 1) A major characteristic of monopoly is A) a single seller of a product. B) multiple sellers of a product. C) two sellers of a product. D) a few sellers
More informationPrice Discrimination
Discrimination A2 Micro Economics Tutor2u, November 2010 Key issues The meaning of price discrimination Conditions required for discrimination to occur Examples of price discrimination Economic efficiency
More informationECON101 STUDY GUIDE 7 CHAPTER 14
ECON101 STUDY GUIDE 7 CHAPTER 14 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) An oligopoly firm is similar to a monopolistically competitive
More information1) 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 informationInternational Pricing with Costly Consumer Arbitrage
Review of International Economics, 7(1), 126-139,1999 International Pricing with Costly Consumer Arbitrage Simon P. Anderson and Victor A. Ginsburgh* Abstract Consumer arbitrage affects international pricing
More information2. 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 informationBEE2017 Intermediate Microeconomics 2
BEE2017 Intermediate Microeconomics 2 Dieter Balkenborg Sotiris Karkalakos Yiannis Vailakis Organisation Lectures Mon 14:00-15:00, STC/C Wed 12:00-13:00, STC/D Tutorials Mon 15:00-16:00, STC/106 (will
More informationChapter 7: Market Structure in Government and Nonprofit Industries. Soft Drinks. What is a Market? Do NFPs Compete? Some NFPs Compete Directly
Chapter 7: Market Structure in Government and Nonprofit Industries Soft Drinks HTTP:/www.economics.emory.edu/Working_Pa pers/wp/2008wp/frisvold_08_08_paper.pdf What is a Market? A market is a process in
More informationQuantity Tax Incidence Subsidy Welfare Effects Case Study. Equilibrium Chapter 16
Equilibrium Chapter 16 Competitive Equilibrium: Motivating Questions Firms are price-takers in competitive markets, but how is the market price (and quantity) determined? competitive equilibrium What happens
More information