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Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,*,*,*,Chapter Twenty-Five,Monopoly Behavior,垄断行为,How Should a Monopoly Price?,So far a monopoly has been thought of as a firm which has to sell its product at the same price to every customer.This is,uniform pricing,.,Can,price-discrimination,（,差别定价）,earn a monopoly higher profits?,Structure,First-degree price discrimination,Second-degree price discrimination,Third-degree price discrimination,Bundling,Two-part tariff,Types of Price Discrimination,1,st,-degree,:Each output unit is sold at a different price.Prices may differ across buyers.,2nd-degree,:The price paid by a buyer can vary with the quantity demanded by the buyer.But all customers face the same price schedule.E.g.bulk-buying discounts.,Types of Price Discrimination,3,rd-degree,:Price paid by buyers in a given group is the same for all units purchased.But price may differ across buyer groups.E.g.,senior citizen and student discounts vs.no discounts for middle-aged persons.,First-degree Price Discrimination,Each output unit is sold at a different price.Price may differ across buyers.,It requires that the monopolist can,discover the buyer,with the highest valuation of its product,the buyer with the next highest valuation,and so on.,First-degree Price Discrimination,p(y),y,$/,output unit,MC(y),Sell the,th,unit for$,First-degree Price Discrimination,p(y),y,$/,output unit,MC(y),Sell the,th,unit for$Later onsell the,th,unit for$,First-degree Price Discrimination,p(y),y,$/,output unit,MC(y),Sell the,th,unit for$Later onsell the,th,unit for$Finally sell the,th,unit for marginal cost,$,First-degree Price Discrimination,p(y),y,$/,output unit,MC(y),The gains to the monopoliston these trades are:and zero.,The consumers gains are zero.,First-degree Price Discrimination,p(y),y,$/,output unit,MC(y),So the sum of the gains tothe monopolist on all trades is the maximumpossible total gains-to-trade.,PS,First-degree Price Discrimination,p(y),y,$/,output unit,MC(y),The monopolist gets the maximum possible,gains from trade.,PS,First-degree price discriminationis Pareto-efficient.,First-degree Price Discrimination,First-degree price discrimination gives a monopolist all of the possible gains-to-trade,leaves the buyers with zero surplus,and supplies the efficient amount of output.,Examples of 1st-degree Price Discrimination,Auction of antique,Car sales,Financial aid in universities,May not be practical,do not know willingness to pay,too costly,Non-linear pricing,Unit price depends on quantity purchased,Bulk discount,Setting,A seller does not know the willingness to pay by each individual buyer,Consumers marginal willingness to pay declines with quantity,Second-degree Price Discrimination,Setting a uniform price is not optimal,Too high a price would lose high volume consumer.,Too low a price would lost revenue from low volume consumer.,Coke example.,Mechanism：Set price for different volumes to let consumers identify themselves,Second-degree Price Discrimination,Two consumers,Person 1 has low willingness-to-pay,Person 1 has high willingness-to-pay,Assume 0 MC,An Example,A,quantity,$/,output unit,x,1,0,x,2,0,C,B,Charge A for,x,1,0,hoping to get person 1,Charge A+B+C for,x,2,0,hoping to get person 2,But person 2 is better off buying x,1,0,and receiving a,cs,=B,Fail to let consumers self-select themselves,Profit=2A,Can alternatively charge,A+C for,x,2,0,to identify person 2,profit=2A+C,Second-degree Price Discrimination,A,quantity,$/,output unit,x,1,0,x,2,0,C,B,Reduce,x,1,0,so A is reduced by a little but C can be increased by a lot。Persons 1 and 2 are still identified,Profit is higher,Second-degree Price Discrimination,A,quantity,$/,output unit,MC(y),x,1,m,x,2,0,C,B,Profit is maximized at,x,1,m,Second-degree Price Discrimination,2,nd,-degree discrimination can also occur in the dimension of quality,Different prices for different seats in a theater,Different prices for economy class vs.business class seats in airplanes,Second-degree Price Discrimination,Third-degree Price Discrimination,Price paid by buyers in a given group is the same for all units purchased.But price may differ across buyer groups.,Quality of goods is the same across groups.,Can identify groups but no further identification within that group.,Third-degree Price Discrimination,A monopolist manipulates market price by altering the quantity of product supplied to that market.,So the question“What discriminatory prices will the monopolist set,one for each group?”is really the question“How many units of product will the monopolist supply to each group?”,Third-degree Price Discrimination,Two markets,1 and 2.,y,1,is the quantity supplied to market 1.Market 1s inverse demand function is p,1,(y,1,).,y,2,is the quantity supplied to market 2.Market 2s inverse demand function is p,2,(y,2,).,Third-degree Price Discrimination,For given supply levels y,1,and y,2,the firms profit is,What values of y,1,and y,2,maximize profit?,Third-degree Price Discrimination,The profit-maximization conditions are,Third-degree Price Discrimination,and,so,the profit-maximization conditions are,and,Third-degree Price Discrimination,MR,1,(y,1,)=MR,2,(y,2,)says that the allocation,y,1,y,2,maximizes the revenue,from selling,y,1,+y,2,output units.,E.g.if MR,1,(y,1,)MR,2,(y,2,)then an output unitshould be moved from market 2 to market 1to increase total revenue.,Third-degree Price Discrimination,The marginal revenue common to bothmarkets equals the marginal production,cost if profit is to be maximized.,Third-degree Price Discrimination,MR,1,(y,1,),MR,2,(y,2,),y,1,y,2,y,1,*,y,2,*,p,1,(y,1,*),p,2,(y,2,*),MC,MC,p,1,(y,1,),p,2,(y,2,),Market 1,Market 2,MR,1,(y,1,*)=MR,2,(y,2,*)=MC,and p,1,(y,1,*),p,2,(y,2,*).,Third-degree Price Discrimination,Recall that,and,In which market will the monopolist,set the higher price?,But,Third-degree Price Discrimination,So,Therefore,only if,The monopolist sets the higher price in,the market where demand is least,own-price elastic.,Examples of 3rd-degree Price Discrimination,Discounts to students,senior citizens,Business travelers and vacationers,Government and private-sector purchasers,Coupons and rebates,First-run movies and dollar movie,Hardcover books and paperback books,Bundling,Types of consumers,Word processor,Spreadsheet,Type A,120,100,Type B,100,120,Willingness to pay for software components,Two Marketing Policies,Sell separately:,Word processor:p=100,revenue=200,Speadsheet,;p=100,revenue=200,Bundling,Set p=220 for the bundle,Revenue=440,Two-Part Tariffs,A two-part tariff is a lump-sum fee,p,1,plus a price p,2,for each unit of product purchased.,Thus the cost of buying x units of product isp,1,+p,2,x.,Two-Part Tariffs,Should a monopolist prefer a two-part tariff to uniform pricing,or to any of the price-discrimination schemes discussed so far?,If so,how should the monopolist design its two-part tariff?,Two-Part Tariffs,p,1,+p,2,x,Q:What is the largest that p,1,can be?,A:p,1,is the“entrance fee”so the largest it can be is the surplus the buyer gains from entering the market.,Set p,1,=CS and now ask what should be p,2,?,Two-Part Tariffs,p(y),y,$/,output unit,MC(y),Should the monopolistset p,2,above MC?,Two-Part Tariffs,p(y),y,$/,output unit,CS,Should the monopolistset p,2,above MC?p,1,=CS.,MC(y),Two-Part Tariffs,p(y),y,$/,output unit,CS,Should the monopolistset p,2,above MC?p,1,=CS.PS is profit from sales.,MC(y),PS,Two-Part Tariffs,p(y),y,$/,output unit,CS,Should the monopolistset p,2,above MC?p,1,=CS.PS is profit from sales.,MC(y),PS,Total profit,Two-Part Tariffs,p(y),y,$/,output unit,Should the monopolistset p,2,=MC?,MC(y),Two-Part Tariffs,p(y),y,$/,output unit,Should the monopolistset p,2,=MC?p,1,=CS.,CS,MC(y),Two-Part Tariffs,p(y),y,$/,output unit,Should the monopolistset p,2,=MC?p,1,=CS.PS is profit from sales.,MC(y),CS,PS,Two-Part Tariffs,p(y),y,$/,output unit,Should the monopolistset p,2,=MC?p,1,=CS.PS is profit from sales.,MC(y),CS,Total profit,PS,Two-Part Tariffs,p(y),y,$/,output unit,Should the monopolistset p,2,=MC?p,1,=CS.PS is profit from sales.,MC(y),CS,PS,Two-Part Tariffs,p(y),y,$/,output unit,Should the monopolistset p,2,=MC?p,1,=CS.PS is profit from sales.,MC(y),CS,Additional profit from setting p,2,=MC.,PS,Two-Part Tariffs,The monopolist maximizes its profit when using a two-part tariff by setting its per unit price p,2,at marginal cost and setting its lump-sum fee p,1,equal to Consumers Surplus.,Two-Part Tariffs,A profit-maximizing two-part tariff gives an efficient market outcome in which the monopolist obtains as profit the total of all gains-to-trade.,Two-Part Tariffs,y,$/,output unit,If there are multiple consumers with,different demands,then optimal price may be higher than MC.,In this case,profit=2T*+(p*-MC)(Q,1,+Q,2,),may be higher than 2,ABC,MC,B,A,C,Q,1,Q,2,P*,T*,Examples of Two-Part Tariff,Telephone hook-up fee,Membership for a club,It is a special case of 2,nd,-degree price discrimination,The more you buy,the lower the unit price.,Rare to see pure monopoly,other firms may compete by producing similar products.,Implications:,The monopolist still has market power demand slopes down,Competition from similar products drives profit to zero.,To minimize competition,a firm tries to differentiate product.,Monopolistic Competition(,垄断竞争),Monopolistic Competition,$/,output unit,y,p(y),y*,p(y*),AC(y),Monopolistic Competition,$/,output unit,y,MC(y),p(y),MR(y),y*,p(y*),AC(y),
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