Econ 4001.01 1st Edition Lecture 18Outline of Last Lecture II. Learner Indexa. Example with calculationsIII. Managing Firms with Market PowerIV. Welfare Implications of Monopoly PowerV. Monopsony- Market with One BuyerVI.Do Governments Care about Monopsony Power?Outline of Current Lecture VII. Pricing with Market PowerVIII. Concentration Ratios and HHIIX. Market Power from Firm’s PerspectiveX. Price Discrimination: Capturing Consumer SurplusXI. Imperfect Price DiscriminationXII. Second Degree Price DiscriminationXIII. Third Degree Price DiscriminationCurrent Lecture- Brief recap of Previous Lectureo Monopolies have market power-ability to set price above marginal costo Market power can be measured using the learner indexo Governments can reduce market power through price regulation- similar to a price ceilingo Marginal value and marginal expenditure in a monopoly- Pricing with Market Powero Firms with market power can… Set price above MC Engage in price discrimination Discourage entry by wasteful spending- Concentration Ratios and HHIo Market power- ability to raise price above MCo Concentration in an industry measures market powerThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.o CRs and HHI used by regulators to determine if a markets are dominated by certain firms with market power who will impact consumer prices and reduce efficiency Also can determine if a merger would result in a high concentrationo A high concentration is considered over 50% and a very high concentration is over 80%o Examples of industries with high concentrations Breakfast cereal Aircraft manufacturing Household laundry equipment Cigaretteso Concentration Ratios and Antitrust Action A CR-4 between 50% and 80% is considered very high A merger between two firms in an industry with HHI or CR-4 in the concentrated range will be investigated A merger between two firms in a highly concentrated industry will likely not be allowed- Market Power from Firm’s Perspectiveo 1st degree price discriminationo 2nd and 3rd degree price discriminationo Tariffso Bundling- Price Discrimination: Capturing Consumer Surpluso Price discrimination involves charging different prices to different groups of customerso 1st degree (Perfect price discrimination): Each customer pays his/her maximum willingness to payo 2nd degree: Seller offers discounts to purchasers of large quantities of the good orserviceo 3rd degree: Seller splits market into two or more groups, based on their WTP and demand elasticityo However, firms have to avoid the resale of the product being sold If a firm sells a product at a lower price to one consumer and they turn around and sell it at a profit, the firm loses money- Imperfect Price Discriminationo Firms may not know all buyers’ maximum WTPo If they know some buyer characteristics, they may be able to set two or more prices in a marketo Examples: Discounted doctor fees for poor patients Senior Citizen discounts New car sales- with patient buyers, able to get a lower price College tuition- using FAFSA to sort out students WTPo Prevention of resale is always a requirement for PDo 1st degree price discrimination is technically illegal in the US due to the Clayton Act- Second Degree Price Discriminationo Volume Discounts Common with consumer products Example is Walmart-Operates Walmart and Sam’s Club Must be able to prevent re-sale (diverting in the trade)o Block Pricing Common with utilities, especially electricity Re-sale is not a big problem with block prices Since many utilities are regulated monopolies, state regulators often are involved in creating block prices- Third Degree Price Discriminationo Splitting consumers into high and low demand groupso Prevention of re-sale is predominant concern hereo Example: airline prices, private grocery labels, student discounts, loyalty cardso We can show that price and quantity are set so that: Quantity such that total market MR equals MC Price for each segment such that