1、Chapter Twenty-FiveMonopoly BehaviorHow 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 earn a monopoly higher profits?Types of Price Discrimination1st-degree:

2、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 Discrimination3rd-degree: Price paid by buy

3、ers 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 DiscriminationEach output unit is sold at a different price. Price may differ across buyers.It req

4、uires 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 Discriminationp(y)y$/output unitMC(y)Sell the th unit for $First-degree Price Discriminationp(y)y$/output unitMC(y)Sell the th unit for

5、$ Later onsell the th unit for $First-degree Price Discriminationp(y)y$/output unitMC(y)Sell the th unit for $ Later onsell the th unit for $ Finally sell the th unit for marginal cost, $First-degree Price Discriminationp(y)y$/output unitMC(y)The gains to the monopoliston these trades are:and zero.T

6、he consumers gains are zero.First-degree Price Discriminationp(y)y$/output unitMC(y)So the sum of the gains tothe monopolist on all trades is the maximumpossible total gains-to-trade.PSFirst-degree Price Discriminationp(y)y$/output unitMC(y)The monopolist gets the maximum possible gains from trade.P

7、SFirst-degree price discriminationis Pareto-efficient.First-degree Price DiscriminationFirst-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.Third-degree Price DiscriminationPrice paid

8、 by buyers in a given group is the same for all units purchased. But price may differ across buyer groups.Third-degree Price DiscriminationA monopolist manipulates market price by altering the quantity of product supplied to that market.So the question “What discriminatory prices will the monopolist

9、 set, one for each group?” is really the question “How many units of product will the monopolist supply to each group?”Third-degree Price DiscriminationTwo markets, 1 and 2.y1 is the quantity supplied to market 1. Market 1s inverse demand function is p1(y1).y2 is the quantity supplied to market 2. M

10、arket 2s inverse demand function is p2(y2).Third-degree Price DiscriminationFor given supply levels y1 and y2 the firms profit is What values of y1 and y2 maximize profit?Third-degree Price DiscriminationThe profit-maximization conditions areThird-degree Price DiscriminationThe profit-maximization c

11、onditions areThird-degree Price Discriminationandsothe profit-maximization conditions areandThird-degree Price DiscriminationThird-degree Price DiscriminationMR1(y1) = MR2(y2) says that the allocation y1, y2 maximizes the revenue from selling y1 + y2 output units.E.g. if MR1(y1) MR2(y2) then an outp

12、ut unitshould be moved from market 2 to market 1to increase total revenue.Third-degree Price DiscriminationThe marginal revenue common to bothmarkets equals the marginal production cost if profit is to be maximized.Third-degree Price DiscriminationMR1(y1)MR2(y2)y1y2y1*y2*p1(y1*)p2(y2*)MCMCp1(y1)p2(y

13、2)Market 1Market 2MR1(y1*) = MR2(y2*) = MCThird-degree Price DiscriminationMR1(y1)MR2(y2)y1y2y1*y2*p1(y1*)p2(y2*)MCMCp1(y1)p2(y2)Market 1Market 2MR1(y1*) = MR2(y2*) = MC and p1(y1*) p2(y2*).Third-degree Price DiscriminationIn which market will the monopolist set the higher price?Third-degree Price D

14、iscriminationIn which market will the monopolist cause the higher price?Recall thatandThird-degree Price DiscriminationIn which market will the monopolist cause the higher price?Recall thatBut,andThird-degree Price DiscriminationSoThird-degree Price DiscriminationSoTherefore, only ifThird-degree Pri

15、ce DiscriminationSoTherefore, only ifThird-degree Price DiscriminationSoTherefore, only ifThe monopolist sets the higher price in the market where demand is least own-price elastic.Two-Part TariffsA two-part tariff is a lump-sum fee, p1, plus a price p2 for each unit of product purchased.Thus the co

16、st of buying x units of product isp1 + p2x.Two-Part TariffsShould 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 p1 + p2xQ: What is the largest that

17、p1 can be?Two-Part Tariffs p1 + p2xQ: What is the largest that p1 can be?A: p1 is the “entrance fee” so the largest it can be is the surplus the buyer gains from entering the market.Set p1 = CS and now ask what should be p2?Two-Part Tariffsp(y)y$/output unitMC(y)Should the monopolistset p2 above MC?

18、Two-Part Tariffsp(y)y$/output unitCSShould the monopolistset p2 above MC?p1 = CS.MC(y)Two-Part Tariffsp(y)y$/output unitCSShould the monopolistset p2 above MC?p1 = CS.PS is profit from sales.MC(y)PSTwo-Part Tariffsp(y)y$/output unitCSShould the monopolistset p2 above MC?p1 = CS.PS is profit from sal

19、es.MC(y)PSTotal profitTwo-Part Tariffsp(y)y$/output unitShould the monopolistset p2 = MC?MC(y)Two-Part Tariffsp(y)y$/output unitShould the monopolistset p2 = MC?p1 = CS.CSMC(y)Two-Part Tariffsp(y)y$/output unitShould the monopolistset p2 = MC?p1 = CS.PS is profit from sales.MC(y)CSPSTwo-Part Tariffsp(y)y$/output unitShould the monopolistset p2 = MC?p1 = CS.PS i