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Monopolies creates a DWL

Price. Monopolies creates a DWL. Uniform Price Monopoly. CS: E+F 0 PS: G+H+K+L E+F+G+H+J+K+L+N TS: E+F+G+H+K+L E+G+G+H+J+K+L+N DWL: J+N 0. E. F. Pm. H. MC. G. J. Pc. N. K. L. D. Quantity. MR. The IEPR.

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Monopolies creates a DWL

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  1. Price Monopolies creates a DWL Uniform Price Monopoly CS: E+F 0 PS: G+H+K+L E+F+G+H+J+K+L+N TS: E+F+G+H+K+L E+G+G+H+J+K+L+N DWL: J+N 0 E F Pm H MC G J Pc N K L D Quantity MR

  2. The IEPR The monopolist's profit maximization condition requires: [P* - MC(Q*)]/ P* = -1/, at the profit max P*, Q* In words, the monopolist's ability to price above marginal cost (markup) is inversely related to the price elasticity of demand. Example: DD: Q = 100P -2 and constant MC = $50, so (P-50)/ P = ½ Solving for P we get P = $100

  3. Prices for UA Flight 815 (1997) Chi to LA

  4. Uniform Pricing vs. Price Discrimination • Definitions A monopolist: • charges a uniform price if it sets the same price for every unit of output sold. • price discriminates if it charges more than one price for its output. • While the monopolist captures profits (or decreases losses) due to an optimal uniform pricing policy, it does not receive the consumer surplus or dead-weight loss associated with this policy. • The monopolist can overcome this by charging more than one price for its product.

  5. Forms of Price Discrimination Definition: A policy of first degree (or perfect) price discrimination prices each unit sold at the consumer's maximum willingness to pay. This willingness to pay is directly observable by the monopolist. Definition:The consumer's maximum willingness to pay is called the consumer's reservation price.

  6. Price Example: Uniform Pricing vs. Price Discrimination Uniform Price Monopoly1st Degree P.D. Monopoly CS: E+F 0 PS: G+H+K+L E+F+G+H+J+K+L+N TS: E+F+G+H+K+L E+G+G+H+J+K+L+N DWL: J+N 0 E F PU H MC G J P1 N K L D Quantity MR

  7. Second-Degree Price Discrimination Definition: A seller engages in second-degree price discrimination by offering consumers a quantity discount. (e.g., computer software.) Another type of second-degree price discrimination: A monopolist charges a multipart tariff if it charges a a lump sum fee (paid whether or not a positive number of units is consumed), F, plus a per unit fee, r X q. This, effectively, charges demanders of a low quantity a different average price than demanders of a high quantity. Example: hook-up charge plus usage fee for a telephone….club membership…

  8. Capturing Surplus with Second-Degree Price Discrimination

  9. Definition: A policy of third degree price discrimination offers a different price for each segment of the market (or each consumer group) when membership in a segment can be observed and resales between consumer groups can be prevented. Example: Movie ticket sales to older people or students at discount Suppose that marginal costs for the two markets are the same. How does a monopolist maximize profit with this type of price discrimination?

  10. Example: Third Degree Price Discrimination Market 1 Market 2 P P 100 Demand 1 80 Demand 2 60 50 20 0 0 100 20 40 Q Q MR1 MR2

  11. Pricing Coal and Grain Movements by Rail

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