Lecture 21 Monopoly behavior

Uniform pricing p y

Elasticity and markup

Gains to trade, CS, PS and DWL y

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?

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.

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

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

Third-degree Price Discrimination which of the two prices is bigger?

Third-degree price discrimination

Two-Part Tariffs A two-part tariff is a lump-sum fee, p1, plus a price p2 for each unit of product purchased. Thus the cost of buying y units of product is p1 + p2y. Bars, Disneyland, many others Optimal design

Two Part Tariff p y

Two-Part Tariffs The monopolist maximizes profit by setting by setting per unit price p2 at MC lump-sum fee p1 equal to CS. Optimal two part tariff gives a monopolist all of the possible gains-to-trade, buyers are with zero surplus, efficient amount of output.