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ECN212 Week 08 Note

by: Phoebe Chang

ECN212 Week 08 Note ECN 212

Marketplace > Business > ECN 212 > ECN212 Week 08 Note
Phoebe Chang
GPA 4.28

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Monopoly Price Discrimination
William Foster
Class Notes
economy, price, monopoly, Money, Microeconomic
25 ?




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This 6 page Class Notes was uploaded by Phoebe Chang on Wednesday March 16, 2016. The Class Notes belongs to ECN 212 at a university taught by William Foster in Spring 2016. Since its upload, it has received 27 views.


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Date Created: 03/16/16
ECN212PriceDiscrimination SpringSEMESTER2016 Professor:Dr.WilliamFoster EliteNotetaker:Phoebe( 1. Price Discrimination  ○ Definition  ■ Selling same product at different prices to different customers  ■ Firm with market power can use price discrimination to increase profit  ■ Gives greater profit than single price strategy  ■ The more inelastic of the demand, the higher the profit will be in a price  discriminated market  ■ Monopoly applies when demand curves are different in different markets  ○ Arbitrage  ■ Taking advantage of price differences for the same good in different markets  by buying low in one marketing and selling high in another  ■ Increases profits for smugglers  ■ Reduces profits for price discrimination firms  ■ Arbitrage activimust be prevented in order to increase profits  ■ Some are easy to prevent  ■ E.g. Services  ○ Examples  ■ Men vs Women products  ■ Coupons  ■ Student/Senior discount  ■ Financial Aid in private colleges  ■ Airline companies— Pay more when shorter notice  ■ Business Traveler (more inelastic demand)  ■ Vacationers (more elastic demand)  ○ Effects  1 ■ Can increase output = increase total surplus = lesser deadweight loss  ■ PPD can eliminate deadweight loss of monopoly  ■ Can increase incentives to innovate and lower fixed costs  ■ E.g. University / Movie / Music / Books  ■ Having very different demand curves  ■ Copyright = Monopoly    2. Perfect Price Discrimination (PPD)  ○ aka first degree price discrimination   ○ Almost impossible to happen  ○ Each customers is charged with his/hers maximum willingness to buy  ■ Zero consumer surplus  ■ Zero deadweight loss  ■ All surplus is producer surplus  ○ Everybody pays a different price  ○ Neither perfect competition and perfect price discrimination is inefficient    3. Tying  ○ Base good is tied to a second good (variable good)  ○ Allows firms to charge a higher price to consumers with a high willingness to pay;  vice versa  ○ Pricing base good lower than variable good  ○ E.g. Printer & Printer ink    4. Bundling  ○ aka Traditional price discrimination  ○ Requires products to be bought together in a bundle or package  ○ Can increase output / total surplus  ○ Can increase innovation due to lower fixed cost (on customers)  ○ Used when firms have more demand for the bundle than single parts  ○ Used when arbitrage is too hard to prevent   ○ Price increase without bundle (e.g. phone with carrier)  ○ E.g. Microsoft Office, iW rk 2 ECN212Monopoly SpringSEMESTER2016 Professor:Dr.WilliamFoster EliteNotetaker:Phoebe( Perfect Competition  ● Competitive Market Conditions  ○ A lot of buyers and sellers  ○ Goods produced by different companies are around the same (perfect substitute)  ○ Few or no barriers to entry and exit  ○ No singleseller or buyer has influence on market price  ○ Everyone is selling at the same market price  ○ Demand rise, market price rise, more firms join the industry, each firm produce more  ● Application  ○ Maximizing profit = minimizing cost (same process)  ○ Stable individual demand (perfectly elastic/flat)  ○ Stable market demand and supply  ○ Firms don’get to decide aboprice  ○ Firms doget to decide abo​uantity  ○ Tiny part of the market (individuals) has no effect on the total market  ○ Examples of competitive markets (different brands = same thing)  ■ Gas  ■ Water  ■ Egg  ■ Gold   ● Demand shows value, supply shows cost          1 Maximizing Profit   ● Terms  ○ Profit = Total revenue ­ Total cost   ○ Profit = (Price­Average Cost) ⨉ Quantity  ■ Positive Profit = Price > Average Cost (MC>AC)  ■ Negative Profit = Price < Average Cost (MC<AC)  ■ Zero Profit = Price = Average Cost (MC=AC)  ○ Total Revenue = Price ⨉ Quantity  ○ Total Cost = Fixed Cost + Variable Cost = Average Cost ⨉ Quantity  ■ Fixed Cost = overhead / operation costs  ■ Variable Cost = input  ○ Marginal Revenue  ■ Change in total revenue ÷ Change in quantity (benefit of the change)  ○ Marginal Cost  ■ Change in total cost ÷ Change in quantity (cost of the change)  ■ The change in total cost from producing one more unit of output  ○ Average Cost  ■ Total cost÷Number of goods produced   ■ Per unit cost of production  ■ Size of production is most efficient when average cost is at the minimum  ■ U­shaped curve since it’s affected by fixed and variable cost   (negative relationship ↑↓)  ● Results of selling its output at market price  ○ Maximization depends on firm’output decision  ○ MR = MC = P is maximum benefit (counted in opportunity cost)  ● Effects  ○ Lower price / revenue increases = elastic  ○ Lower price / revenue decreases = inelastic  ○ Lower price / revenue same = unit elastic        2 Minimizing Total Cost   ● Pursuit of profits in competitive market = minimizes total costs  ● Allocate production across firms can minimize total  osts Entry and Exit Under Competition   ● Long­run  ○ Entry when P > AC  ○ Exit when P < AC  ○ No exit or entry wheP=AC  ■ Zero economic profit can be positive accounting profit (not the same thing)  ■  Normal rate of return  ● Short­run (uncertainty and sunk costs)  ○ Depends on variable cost  ○ Firms stay in operation if fixed cost > variable cost  ○ Should be  included the value of time / employees pay etc  ○ Sunk Cost​ cannot be recovered shouldn’t be included to decision  ○ Lifetime expected profi­ alternative resolution for the problem for a firm  ● Entrepreneurs  ○ Chasing profits by entering high profit industries / exiting low profit industries   ○ Needs to innovate to earn above normal profit due to elimination principle  ○ Creative Destruction = those who fail to adapt innovations   ● Elimination Principle (Profits stays stable)  ○ Above normal profits are eliminated by entry  ○ Below normal profits are eliminated by  xit 3 Industry Supply Curve   ● Increasing Cost Industry  ○ Costs increase when output increases   ○ Upward sloping supply curve   ○ E.g. Pollution deduction / Drilling oil  ● Constant Cost Industry  ○ Costs don’t change when output increases  ○ Flat supply curve  ● Decreasing Cost Industry  ○ Costs decrease when output increases  ○ Downward sloping supply curve    Calculation   ● Profit = Area of the box that is (price ­ average cost)×Quantity  ● Consumer Surplus + Producer Surplus + Tax Paid = Total Surplus  ● Consumer tax paid + Producer tax paid = Tax Paid  ● Deadweight loss = (Consumer paid tax ­ producer paid tax)×(Q­Q*)× 0.5    4


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