6.2 Regulation and Price Discrimination

1. 6.2 Regulation and Price Discrimination 6.2.1 Regulatory Options 6.2.2 Price Discrimination 6.2.3 Summary

2. Application “Microsoft loses anti-trust appeal, 17th September 2007 • Microsoft lost an appeal against a £343 million fine given in 2004 for abusing its dominant market position • Microsoft had been bundling Windows operating system with other packages, notably Media Player • It had domination in operating systems and was using that to lever domination in media players too; the makers of Realplayer complained for example • Is this an effective punishment though?

3. 6.2.1 Regulation If inefficiency exists, need to reduce/remove via regulation 1. Maximum Price Policy MC P P = MC or P = ATC ATC Pe Pmax AR = D MR Q1 Qe Q

4. 2. Lump sum Tax MC P ATC1 ATC Pe AR = D MR Qe Q

5. 3. Per Unit Tax MC1 P MC ATC1 Pt ATC Pe AR = D MR Qt Qe Q

6. 6.2.2 Price Discrimination A) Multiplant Production Firm can produce at two plants but aims to profit max. How? so but thus i.e.

7. B) Price Discrimination At the market price consumers get surplus which firms seek to capture Consumer surplus P1 How is it captured? Pe Charge different prices to different consumers Q1 Qe

8. Requirements for price discrimination: 1. Must be a monopoly 2. Must be able to identify and separate out different consumers 3. Consumers must have different elasticities of demand 4. No leakages between markets

9. First Degree Price Discrimination P MC ATC Pe Ppd AR = D MR Qe Qpd Q

10. Second Degree Price Discrimination P MC P1 ATC Pe AR = D MR Q1 Qe Q

11. Third Degree Price Discrimination ARd Pd ARf Pf MC MRd Qf Qd MRf Foreign Domestic

12. 6.2.3 Summary Monopoly is highly inefficient as P > MC and plant size incorrect Some regulation reduces this inefficiency Monopolists do not have a supply curve They can extract consumer surplus by using price discrimination