ECON 202 1nd Edition Lecture 27 Outline of Last Lecture I. Monopolya. Price Makersb. Profit Maximization - Monopoliesc. Compare: Perfectly Competitive Industries and Monopoliesd. Regulating Natural MonopoliesOutline of Current Lecture I. Price Discriminationa. Conditions for Price Discriminationb. Profit Maximization - With Price Discrimination c. Perfect Price DiscriminationCurrent LecturePrice Discrimination- The practice of charging different prices to different consumers for identical goodsConditions for Price Discrimination1. The firm must face a downward sloping demand curve (i.e. they must have some market power)2. Different groups of buyers must a. Have different price elasticities of demand (different willingness to pay)b. Be easily identifiable3. Low probability of resaleIf different consumer groups have different demand elasticities, it is more profitable to charge different prices to different consumers than to charge one price to everybodyProfit Maximization – With Price Discrimination- to maximize profits, the firm should charge a HIGHER price to the group with the LESS elastic demand and a LOWER price to the group with the MORE elastic demandThese 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.Ex: Airline Price DiscriminationAssumptions:- Constant cost industry (MC = ATC)- 2 types of consumerso Business travelerso Vacation travelersThe firm will earn more profit by charging different prices to each group than by charging the same price to each groupPerfect Price Discrimination- Each consumer is charged by his/her maximum willingness to payEx: Assume a constant cost industryPerfect CompetitionSingle PriceMonopolyPerfect Price DiscriminationP PCPMVariousQ Q2Q1Q2 (efficient)CS ACPCABPM0PS 0 PMBEPCACPCTS ACPCABEPCACPCDWL 0 BCE 0DBusiness$QMRBATC = MCPBQB$DVacationQMRVATC = MCPVQV$DQMRATC = MCPCPMABCEQ1Q2Price Discrimination – Good or Bad- Depends on what happens to total outputo Bad: total output falls or stays the sameo Good: total output
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