Lecture 21Uniform pricingElasticity and markupGains to trade, CS, PS and DWLHow Should a Monopoly Price?Types of Price DiscriminationFirst-degree price discriminationFirst-degree Price DiscriminationThird-degree Price DiscriminationSlide 10Slide 11Third-degree price discriminationTwo-Part TariffsTwo Part TariffSlide 15Lecture 21Monopoly behaviorUniform pricing ( ) 10y p p= -( ) 1 2TC y y= +pyElasticity and markup y py peD D=Gains to trade, CS, PS and DWL ( ) 10y p p= -( ) 1 2TC y y= +pyHow Should a Monopoly Price?The same price for each unit to every customer - uniform pricing.Price discrimination – many different prices for the same goodCan price-discrimination earn a monopoly higher profits?Types of Price Discrimination1st-degree: Prices may differ across output units and buyers.2nd-degree: Prices may differ across output unit but not buyers. (E.g. bulk-buying discounts.) 3rd-degree: Prices may differ across buyers but not output units (student discounts)Two part tariffFirst-degree price discrimination ( ) 10y p p= -( ) 1 2TC y y= +pyFirst-degree Price DiscriminationFirst-degree price discrimination–gives a monopolist all of the possible gains-to-trade, –buyers are with zero surplus, –efficient amount of output.Third-degree Price DiscriminationMarket has segments - groups of buyers (seniors, students, adults)In each segment the same pricePrices different across groupsCommon in real lifeThird-degree Price Discrimination Example: individual buyers, institutionsSecrets of happinessThird-degree Price Discriminationwhich of the two prices is bigger?Third-degree price discrimination 3( ) 652( ) 45F FI Iy p py p p= -= -( ) 1 2TC y y= +Two-Part TariffsA two-part tariff is a lump-sum fee, p1, plus a price p2 for each unit of product purchased.Thus the cost of buying y units of product isp1 + p2y.Bars, Disneyland, many others Optimal designTwo Part Tariff ( ) 10y p p= -( ) 1 2TC y y= +pyTwo-Part TariffsThe monopolist maximizes profit by setting–by setting per unit price p2 at MC –lump-sum fee p1 equal to CS.Optimal two part tariff–gives a monopolist all of the possible gains-to-trade, –buyers are with zero surplus, –efficient amount of
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