Monopoly Part 2

1. Monopoly Part 2

2. Pricing with Market Power Price Discrimination First Degree Price Discrimination Second Degree Price Discrimination Third Degree Price Discrimination

3. AR, AC, P MC N P2 M P1 T P3 D = AR MR Q O Q2 Q1 Q3 Capturing Consumer Surplus

4. AR, AC, P MC N P2 M P1 T P3 D = AR MR Q O Q2 Q1 Q3 First degree price discrimination reservation price

5. AR, AC, P MC A B M P1 C D T P2 F E D = AR MR Q O Q1 Q2

6. Exercise Suppose a monopolist has a constant marginal cost MC = 2. The firm faces the demand curve P = 20 – Q. There are no fixed cost. Suppose price discrimination is not allowed. How large will the producer surplus be? Suppose the firm can engage in perfect first degree price discrimination. How large will be producer surplus be?

7. AR, AC, P N P1 M P2 T P3 D = AR Q O Q1 Q2 Q3 Second degree price discrimination block pricing

8. AR, AC, P N P1 M P0 R P2 AC T MC P3 D = AR MR Q O Q1 Q0 Q2 Q3

9. Third degree price discrimination A firm must have some market power to price discrimination The firm must have some information about the different amounts people will pay for its product A firm must be able to prevent resale, or arbitrage MR1 = MR2 = MC

10. P P MC D1 D2 MR1 MR2 Q Q

13. Exercise Suppose a railroad faces the following demand for coal movement Pc = 38 – Qc Where Qc is the amount of coal moved when the transport price for coal is Pc. The railroad’s demand for grain movement is PG = 14 – 0.25QG where QG is the amount of grain shipped when the transport price for grain is PG. Themarginal cost for moving either commodity is 10. What are the profit maximizing rates for coal and grain movement?

14. Intertemporal Price Discrimination P Pt Pt+1 Dt+1 MRt+1 Dt MRt Q Qt Qt+1

15. Peak – Load Pricing P MC P1 P2 D1 MR1 D2 MR2 Q Q2 Q1

16. Peak – Load Pricing & Welfare P MC P1 P P2 D1 D2 Q Q2* Q2 Q1* Q1

17. Two Part Tariff P Usage Fee Entry Fee Entry Fee P MC Q

18. P A T P B MC D1 D2 Q Q2 Q1 Two Part Tariff Two Consumers Profit = 2T + ( P – MC )(Q1 + Q2 ) C

19. Three Three VENUS VENUS A A 12,000 12,000 4,000 3,000 B B 10,000 10,000 4,000 3,000 Bundling Negative correlated Positive correlated

20. P1 R2 Separated price Buy Both Buy only good 2 P2 Buy neither Buy only good 1 R1

21. P1 R2 Bundled price Buy Both P2 Buy neither R2= PB – R1 R1

22. P1 R2 Bundled price Buy Both P2 Buy neither R2= PB – R1 R1

23. P1 R2 Bundled price Buy Both P2 Buy neither R2= PB – R1 R1

24. Advertising MRAdv = full Marginal cost of Ad.

25. Advertising to sale ratio

26. Division 1 Division 2 Q2 , P2 Q1 , P1 Division X Q , P Transfer Pricing No Outside Market Firm X Q = f ( K, L, Q1, Q2 )

27. For Firm

29. Exercise Race Car Motors has the following demand for automobile P = 20,000 – Q MR = 20,000 – 2Q Downstream division cost of assembling cars is CA( Q ) = 8000Q MCA = 8000 The upstream division cost of producing engines is CE( QE ) = 2QE2 MCE ( QE ) = 4QE

30. Monopsony Monopsony is a market consisting of single buyer that can purchase from many sellers. Some buyers may have Monopsony power : a buyer’s ability to affect the price of a good. Monopsony power enables the buyer to purchase the good for less than the price that would prevail in the competitive market

31. AR, P AR, P MC ME = AE AR = MR P* D = MV Q Q Q* Q* Competitive Buyer & Competitive Seller

32. AR, AC, P Monopsonist Buyer ME S = AE PC PM MV QM QC

33. AR, AC, P AR, AC, P ME MC S = AE PM PC PC PM AR MV MR QM QC QM QC Monopoly and Monopsony

34. AR, AC, P ME ME S = AE S = AE MV – P* P* MV – P* P* MV MV Q* Q* AR, AC, P

35. Source of Monopsony Power The Elasticity of Market Supply The Number of Buyer The Interaction among Buyers

36. AR, AC, P ME S = AE B PC C A PM MV QM QC Deadweight Loss