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Economics 202: Intermediate Microeconomic Theory

Economics 202: Intermediate Microeconomic Theory. Read Chapter 15 up to Tacit Collusion HW on website due Thursday. Two-Part Tariffs: Identical Customers. Two-part tariff is composed of a fixed entry fee for which you get the right to

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Economics 202: Intermediate Microeconomic Theory

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  1. Economics 202: Intermediate Microeconomic Theory • Read Chapter 15 up to Tacit Collusion • HW on website due Thursday

  2. Two-Part Tariffs: Identical Customers • Two-part tariff is composed of a fixed entry fee for which you get the right to buy as much as you want at a fixed price per unit. 1st, 2nd, or 3rd degree? • Examples? • tennis club, AT&T “7¢ One Rate”, the Price Club, Disneyworld, Polaroid cameras • How does a firm decide how much to charge as a fee and how much per unit? • Typically, this is complicated, but less so when all customers have same d-curve. • How do we know this P and Fee will maximize  on this customer? $/unit CCG Consumer’s Point of View Fee Fee CS> 0 at this point MC=AC P deveryone Q telephone minutes telephone minutes

  3. Two-Part Tariffs: Non-Identical Customers • Firms would like to extract the max CS from each customer • This requires charging a different fee to each customer • Typically a firm will charge the same entry fee b/c hard to identify diff demands • Two-part tariff when consumers have different demand curves • No general rule; Firms generally use trial & error to find optimal (fee, P) • At P,  = 2*orange fee triangle. At P’,  is higher by trapezoid area A! • Firm can   by lowering the entry fee and raising the per-unit price (above MC) $/unit CCG Consumer’s Point of View Fee P’ A MC=AC P dTotal d1 d2 telephone minutes telephone minutes

  4. Two-Part Tariffs: Example • You own a tennis club and have decided to use a two-part tariff pricing scheme. There are 2 types of tennis players. “Serious” players have weekly demand Qser=6 – P, and “occasional” players have weekly demand Qocc= 3 – (P/2). For simplicity, assume there is only 1 player of each type. You’ve got tons of courts, so MC of another court hour is $0. • (a) Suppose that to maintain a “professional” atmosphere, you want only serious players to join. How should you set the price per court hour and membership fee? What are weekly profits? • (b) Will you make more profit if your (Price,Fee) combination encourages both types of players to join?

  5. Market Structures • Continuum of market structures CompetitionMonopolistic CompetitionOligopolyMonopoly many firms/buyers many smaller firms small # of bigger firms 1 supplier free entry/exit free entry/exit difficult to enter barriers to entry product homogeneity differentiated products same or different Q one product perfect information perfect info imperfect info imperfect info • Examples: Farmer’s market fast food, clothes, steel , cars, cell phones, local cable cereals, aspirin, colas ABC/NBC/CBS/Fox local utility Microsoft? • Features: Some monopoly power: L > 0 Interdependent actions D-curve is not Dmarket No single oligopoly theory ’s are eroded by entry; econ = 0

  6. Models of Oligopoly • Augie Cournot model • Hank Stackelberg model • Joe Bertrand model • Dominant Firm (or Price Leadership) model • Cooperative (cartel) model

  7. Pricing Under Homogeneous Oligopoly • Assume that the market is perfectly competitive on the demand side • there are many buyers, each of whom is a price taker • Assume that the good obeys the law of one price • this assumption will be relaxed when product differentiation is discussed • Assume that there is a relatively small number of identical firms (n) • we will initially start with n fixed, but later allow n to vary through entry and exit in response to firms’ profitability • The output of each firm is qi (i=1,…,n) • symmetry in costs across firms will usually require that these outputs are equal

  8. Pricing Under Homogeneous Oligopoly • The inverse demand function for the good shows the price that buyers are willing to pay for any particular level of industry output P = f(Q) = f(q1+q2+…+qn) • Each firm’s goal is to maximize profits i = f(Q)qi–Ci(qi) i = f(q1+q2+…qn)qi –Ci

  9. Oligopoly with Fixed Number of Firms • Reaction Functions • P = a - bQ, MC = c, Q = q1 + q2 • Profits for firm 1? (q1) = Pq1 - cq1 = (a-bq1-bq2) q1 - cq1 Max   MR = MC  a -2bq1-bq2= c Solving for q1  q1= (a-c-bq2)/2b This is firm 1’s “Reaction Function” Cournot Duopoly Firm 2 output (a-c)/b • (a-c)/2b q2* • Firm 2 has same solution • Which pair of quantities is Nash equilibrium? q1* (a-c)/b (a-c)/2b Firm 1 output • Solve the two reaction functions • q1* = (a-c)/3b = q2* • Market Price = a/3 + 2c/3 < Monopoly Price • Cournot model says total output is greater than monopoly, Price and total profits lower

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