Monopolistic behavior Lecture 20 Monopolistic behavior

Uniform pricing p y

TPS, CS, PS and DWL p y

Monopolistic market structure Monopoly is socially suboptimal Generates Pareto inefficiency Shifts surplus from consumers to large producers

Measurement of market power How to measure market power? Candidate 1: Problem: Candidate 2:

Elasticity and markup

Elasticity and Markup With MR=0, elasticity= Elastic part relevant

How Should a Monopoly Price? The same price for each unit to every customer - uniform pricing. Price discrimination – many different prices for the same good Can price-discrimination earn a monopoly higher profits? How about efficiency?

Types of Price Discrimination 1st-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 tariff

First-degree price discrimination y

First-degree Price Discrimination gives a monopolist all of the possible gains-to-trade, buyers are with zero surplus, efficient amount of output. Solves one problem but makes the other worse

Third-degree Price Discrimination Market has segments - groups of buyers (seniors, students, adults, firms) In each segment the same price Prices different across market segments Common in real life

Third-degree Price Discrimination Example: individual buyers, firms Secrets of happiness

Third-degree Price Discrimination Why price is smaller?