1. Lecture 21
Monopoly behavior

2. Uniform pricing p y

3. Elasticity and markup

4. Gains to trade, CS, PS and DWLy

5. 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?

6. 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

7. First-degree price discriminationy

8. First-degree Price Discrimination
gives a monopolist all of the possible gains-to-trade,
buyers are with zero surplus,
efficient amount of output.

9. 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

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

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

12. Third-degree price discrimination

13. 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

14. Two Part Tariff p y

15. 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.