Columbia SIPA U8213 - Monopoly & Price Discrimination (4 pages)

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Monopoly & Price Discrimination



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Monopoly & Price Discrimination

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Lecture Notes


Pages:
4
School:
Columbia University
Course:
Sipa U8213 - MICROECONOMICS AND POLICY ANALYSIS

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MICROECONOMICS AND POLICY ANALYSIS U8213 Professor Rajeev H Dehejia Class Notes Spring 2001 Monopoly Price Discrimination Monday March 5 Reading PR chapter 10 14 3 14 4 Monopoly Sellers have market power Price is a function of quantity pq C q D q q C q Max R q C q 0 q q D q q D q C q 0 q P P MC D q q Transfer from consumers to producers MC P Pm Total dead weight loss P Part lost by producers C q As quantity increases price decreases on all previous units P aq b original demand R q pq aq b q aq2 bq R q 2aq b D MR Qm Q Q There is a deadweight loss due to the monopoly form a reduction in quantity with respect to Q A monopolist can choose either quantity or price but not both Price will be a function of quantity 1 Monopolists charge at a price greater than marginal cost How much higher P MC D q q P MC D q q P Q 1 P P Q P ED Mark up is a function of the elasticity of demand If demand is inelastic then the mark up is high If demand is elastic then the mark up is low The elasticity of demand is a large determinant of market power Price Discrimination The law of one price is an outcome of competitive pressures The deviations from the law of one price usually are the result of market power Intertemporal Market Power Ex Price of roses on Valentine s Day Three Types of Price Discrimination A Perfect 1st Degree Price Discrimination MC Pm MR Qm D Q If the monopolist can charge different prices to different people then they will charge everyone their reservation price In other words the monopolist would charge everyone their maximum price This eliminates consumer surplus but there is no dead weight loss either Producers are 2 willing to sell up to Q But in reality it is hard to determine individuals reservation prices and thust to implement 1st degree price discrimination B 2nd Degree Price Discrimination Based on the price elasticity of demand The monopolist would charge different consumers different prices based on the quantity purchased In other words they deduce willingness



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