End of Monopoly Lecture 24 Dr Jennifer P

End of Monopoly Lecture 24 Dr. Jennifer P. Wissink © 2017 John M. Abowd and Jennifer P. Wissink, all rights reserved. May 1, 2017

Third Degree Price Discrimination: Conduct and Performance u The monopolist separates his market into “segments. ” – – – u u u by age by gender by income by zip code by attitudes by anything that will work for him! The monopolist charges a different price to each segment. The monopolist charges the same price on all units sold WITHIN the same segment. This type of discrimination will yield MORE profits than under simple monopoly when the own price elasticities of demand DIFFER across the different segments when you charge everyone the same simple monopoly price.

Third Degree Price Discrimination: Conduct & Performance $ Pa Pk Dkids Dadults mc mc mrkids mradults Qa Qa 0 Qk Qk

Believe It Or Not u When: early 1990’s u Market: contact lenses u Firm: Bausch & Lomb u Lenses: – – Optima @ $70/pair - wash and keep 1 year Medalist @ $15/pair - wash and keep 2 months See. Quence 2 @ $8/pair - wash and keep 2 weeks Occasions @ $3/pair - daily and disposable each day u Guess what?

Believe It Or Not u u u They were all the same lenses! Just packaged differently! What would you pay for a year? – – u Optima = $70/pair - wash and keep 1 year Medalist = $15 x 6=$90 (last 2 months) See. Quence 2 = $8 x 26=$208 (last 2 weeks) Occasions = $3 x 365 = $1095 What would I do? Buy the Occasions and wash and wear until my eyes hurt. u Class action suits were eventually settled.

More Ways To Discriminate u Information or Knowledge – Local versus tourist u Time and/or Flexibility – Business versus Leisure u u New versus Repeat Customer Interesting Read: The adult-book premium – http: //www. economist. com/blogs/freeexchange/2011/11/pricediscrimination – THANKS TO Brit G! u My favorite. . – Examining Differences in Drug Prices – http: //www. nytimes. com/2000/09/21/business/examining-differencesin-drug-prices. html

Sample Problem Solving u Suppose you are given this demand information: – Adults: QA = 100 – 2 P OR PA = 50 – 1/2 Q – Kids: QK = 80 – 2 P OR PK = 40 – 1/2 Q u Suppose you are given this cost information: – total cost = 15 Q, where Q = QA+QK – fc=0 and avc = atc = mc = 15 u FIND: – the simple monopoly solution – the 1 st degree price discrimination solution – the 3 rd degree price discrimination solution

The Simple Monopoly Solution Adults: QA = 100 – 2 P OR PA = 50 – 1/2 Q Kids: QK = 80 – 2 P SM: QSM = 180 - 4 P OR PK = 40 – 1/2 Q PSM = 45 - 0. 25 Q tc = 15 Q, where Q = QA+QK mc=atc=avc=15 mc 15 D mrsm

The Simple Monopoly Solution: QSM=60 and PSM=$30 Adults: QA = 100 – 2 P OR PA = 50 – 1/2 Q Kids: tc = 15 Q, where Q = QA+QK mc=atc=avc=15 15 mc QK = 80 – 2 P OR PK = 40 – 1/2 Q mc

The First Degree Price Discrimination Monopoly Solution Demand: Q = 180 - 4 P P = 45 - 0. 25 Q tc = 15 Q, where Q = QA+QK mc=atc=avc=15 mc D = mr FD

The First Degree Price Discrimination Monopoly Solution 15 mc mc Adults: QA = 100 – 2 P OR PA = 50 – 1/2 Q Kids: QK = 80 – 2 P OR PK = 40 – 1/2 Q tc = 15 Q, where Q = QA+QK mc=atc=avc=15

Third Degree Price Discrimination Adults: QA = 100 – 2 P OR PA = 50 – 1/2 Q Kids: QK = 80 – 2 P OR PK = 40 – 1/2 Q tc = 15 Q, where Q = QA+QK mc=15

Summary: Sample Problem Solving PA PK QA QK QTot profit $NSS $PS $CS simple monopoly $30 40 20 60 $900 $1400 $900 $500 1 st degree PD 70 different, last=$15 50 different, last=$15 70 50 120 $1850 $0 3 rd degree $32. 50 $27. 50 35 PD 25 60 $925 $1387. 50 $925 $462. 50

Using Multiple Two Part Tariffs to Price Discriminate u Suppose two types of cell phone users: identical old ladies and identical college kids – Assume college kids get loads more surplus from using their minutes than old ladies do. u Consider cell phone plans – Perfect/1 st degree price discrimination via a multiple two-part tariff pricing scheme » » » Set monthly fee to college kids = $Fee. CK = $CSCK. Set monthly fee for old ladies = $Fee. OL=$CSOL. Note: $Fee. CK > $Fee. OL Now set one common price/per minute = $P. Best case scenario for monopolist. Would be equivalent to perfect/1 st degree price discrimination, but a heck of a lot easier to implement. » But. . . will it work?

Using Multiple Two Part Tariffs to Price Discriminate u But. . Perfect Price Discrimination FAILS. – College kids will want to “pretend” they are old ladies.

Using Multiple Two Part Tariffs to Price Discriminate u IMperfect Price Discrimination with twopart tariff pricing schemes $ amount you pay Plan A: slope=$. 25 Plan B: slope=$. 05 PLAN A: Monthly Fee=$20, and then you pay 25¢ per minute PLAN B: Monthly Fee=$100, and then you pay 5¢ per minute u Can get a “separating equilibrium” with “self selection”. $100 $20 # minutes

Moving On… Monopolistic Competition: Structure u Structure: – – u Several firms in the market. Firms produce differentiated products. “Free” entry and exit. Full and symmetric information. Re: Differentiated Products – Actual: taste, color, location, service, etc. – Perceived: lei jeans vs. Wranglers! u Intellectual “Parents” – Joan Robinson (economist at Cambridge in the U. K. ) – Edward Chamberlin (economist at Harvard in Cambridge, MA) – Both pioneered the work on monopolistic competition in the early 1930’s. u “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists. ”

Monopolistic Competition: Short Run Conduct u Looks and acts just like a mini-simple-monopolist. srmc $ sratc PMC atc. MC demand for GV Jeans q. MC q mr

Monopolistic Competition: Long Run Conduct u Free entry will force firm long run economic profits to zero. $ lratc lrmc u So at qmc need: – 1) profit max and – 2) zero profit and – 3) a downward sloping firm demand corresponding marginal revenue. u Firm’s demand curve will be tangent to its long run average total cost curve. PMC demand for GV jeans q q. MC mr

Monopolistic Competition: Performance (Efficiency & Equity) u i>clicker question Is the monopolistically competitive firm Pareto/Allocatively Efficient? A. Yes. B. No. C. Maybe so u i>clicker question Is the monopolistically competitive firm productively efficient? A. Yes. B. No. C. Maybe so