ECON 1123 Edition 1st Lecture 19 Outline From Previous Lecture Lecture 18 I Monopoly Inefficiency II Monopoly Characteristics Revisited Outline Lecture 19 I Price Discrimination II Regulating the Natural Monopolist III How do you tell monopoly power Lecture 19 Notes I Price Discrimination Price Discrimination charging different customers different prices for the same product Three types of price discrimination 1 First degree perfect price discrimination charging each customer the maximum priced each is willing to pay They will do this until the demand meets the ATC schedule because if they do that past that point on the demand schedule they will incur loss 2 Second degree Price discrimination Charging different customers based on the quantities purchased This is called tiered pricing 3 Third degree price discrimination charging different groups of customers different prices example airlines will charge business people more than vacationers because business people have more inelastic demand that says that they really need to be somewhere II Regulating the Natural Monopolist Natural monopoly large economies of scale declining ATC mean the efficient scale of operations is roughly equal to market demand electrical company water company Marginal Cost pricing rule Regulations force the natural monopoly public utility to charge a price that equals marginal cost Average Cost Pricing Regulators require the natural monopoly to charge a price to average total costs At Price of average total costs the utility earns normal accounting profits These 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 III Rate of return regulation Regulators allow the monopoly to earn normal accounting profits by estimating or calculating a reasonable return on invested capital Problem which costs and capital investments should be included Price Caps regulators only allow the monopoly utility to charge certain Capped maximum prices Case study California energy crisis 2000 2001 Wholesale prices for the company went up 800 but the electric company sells in the retail market at capped prices trying to make electricity available for everyone The company went bankrupt and there were shortages of power in San Francisco How do you measure monopoly power a Concentration ratio b Herfendal Hirschman Index HHI Concentration ration equal to the share of industry sales accounted for by the largest firms in the industry usually largest 4 or largest 8 However sometimes you cannot just rely on the CR so you use HHI Herfendal Hirschman index A way of measuring industry concentration equal to the sum of the square of market shares of all firms in the industry
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