Price Discriminating Monopoly Lecture 23 Dr. Jennifer P. Wissink ©2017 John M. Abowd and Jennifer P. Wissink, all rights reserved. April 26, 2017

Announcements(micro)-Spring 2017 I got nothin’ today…

Perfect Competition (PC) vs Simple Monopoly (SM) Before (PC) After (SM) Price Quantity Consumers' Surplus Producers’ Surplus Net Social Surplus MCsoc mcSM SRS MBsoc Demand mrSM

So: Are Monopolies Good? Bad? Ugly? Depends.... What kind of monopoly is it? From whose point of view are we asking? How did the monopoly position come about? How is the monopoly position maintained? How does the monopoly behave?

So: Should the Government Regulate Monopolies? Essentially all monopolies are regulated, in some way or another. Natural monopolies are regulated by price commissions that determine the rates the monopolies may charge. Patent, copyright and license protections are a form of ex ante regulation: firms that follow the rules for establishing the validity of their innovations receive the protection of the patent, copyright or license. Should the government do more? Good question.

Ways the Government Can Regulate Monopolies – DO/KNOW THESE! How about a per unit tax on the output of the monopolist? What would that do? How about a per unit subsidy on the output of the monopolist? What would that do? How about a tax on the economic profit of the monopolist? What would that do? How about a binding price ceiling on the monopolist? What would that do? How about breaking up the monopoly? What would that do? How about taking away the patent? What would that do?

Placing a Price Ceiling on the Simple Monopolist mc PSM Demand QSM mrSM

Placing a Per Unit Tax on the Simple Monopolist’s Output mc PSM Demand QSM mrSM

How About Price Discriminating Monopolists? A monopolist might be able to charge different prices for different units sold and enhance its profits. charge different people different prices charge the same person different prices for different units Price Discrimination charging different prices for different units with no cost basis for the differential in price charging the same price for different units when there are cost differences

Requirements for Price Discrimination Some amount of monopoly power. An ability to prevent resale. Detailed information about who is buying what unit, and what that demander is willing to pay.

Believe It Or Not What would you do to prevent resale??? When: 1940’s Market: plastic molding powder industrial users: .85/pound denture manufacturers: $22/pound Firm: Rohm and Haas Problem: resale from industrial users to denture manufacturers was reducing profit Solution: rumor you are mixing arsenic in the powder sold to industrial users!

Two Classic Forms of Price Discrimination First Degree Price Discrimination (aka Perfect) Charge a different price for each unit sold. So you march down the demand curve. The most extreme form of price discrimination. Third Degree Price Discrimination Segment market and then charge a different price in each market, same price within the market segment. Exploit the observation that at the simple monopoly price the own price elasticity of demand differs across the defined segmented markets. Price discrimination comes in many other “flavors”

i>clicker question So, for the perfectly discriminating monopolist which statement is TRUE? Price equals marginal revenue for all values of Q. Price is less than marginal revenue for all Q>0. Price is greater than marginal revenue for all Q>0. When price is falling marginal revenue must be rising. Marginal revenue equals marginal cost for all values of Q. Just a friendly reminder, in case you have any thoughts on considering it… leaving lecture after an i>clicker question and before class is over is considered a violation of the code of conduct… don’t want anyone to forfeit their entire semester of i>clicker points and have a violation in their permanent record for not realizing how we deal with it. Demand

First Degree (Perfect) Price Discrimination: Conduct and Performance The perfectly discriminating monopolist’s marginal revenue is identical to its market demand curve. Note: The monopolist does not lower the price on all preceding units to sell the next! The monopolist now follows the rules for profit maximization and sets mrfd=mc to get Qfd. The monopolist charges a different price for each unit sold according to the demand curve. Performance: Is Qfd Pareto/Allocatively Efficient (AE) ? All the net social surplus goes to the monopolist as producer’s surplus. Consumers’ surplus = $0! Is Qfd productively efficient (pe)? Is Qfd equitable?

Third Degree Price Discrimination: Conduct and Performance The monopolist separates his market into “segments.” by age by gender by income by zip code by attitudes by anything that will work for him! The monopolist charges a different price to each segment. The monopolist charges the same price on all units sold WITHIN the same segment. When will this type of discrimination yield MORE profits than under simple monopoly?