Monopoly behavior

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Lecture 21

• Monopoly behavior

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Uniform pricing

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Elasticity and markup

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Gains to trade, CS, PS and DWL

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How Should a Monopoly Price?

• The same price for each unit to every customer -
  uniform pricing.
• Price discrimination many different prices for
  the same good
• Can price-discrimination earn a monopoly higher
  profits?

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Types of Price Discrimination

• 1st-degree Prices may differ across output units
  and buyers.
• 2nd-degree Prices may differ across output unit
  but not buyers. (E.g. bulk-buying discounts.)
• 3rd-degree Prices may differ across buyers but
  not output units (student discounts)
• Two part tariff

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First-degree price discrimination

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First-degree Price Discrimination

• First-degree price discrimination
• gives a monopolist all of the possible
  gains-to-trade,
• buyers are with zero surplus,
• efficient amount of output.

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Third-degree Price Discrimination

• Market has segments - groups of buyers (seniors,
  students, adults)
• In each segment the same price
• Prices different across groups
• Common in real life

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Third-degree Price Discrimination

• Example individual buyers, institutions
• Secrets of happiness

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Third-degree Price Discrimination

• which of the two prices is bigger?

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Third-degree price discrimination

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Two-Part Tariffs

• A two-part tariff is a lump-sum fee, p1, plus a
  price p2 for each unit of product purchased.
• Thus the cost of buying y units of product
  is p1 p2y.
• Bars, Disneyland, many others
• Optimal design

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First-degree price discrimination

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Two-Part Tariffs

• The monopolist maximizes profit by setting
• by setting per unit price p2 at MC
• lump-sum fee p1 equal to CS.
• Optimal two part tariff
• gives a monopolist all of the possible
  gains-to-trade,
• buyers are with zero surplus,
• efficient amount of output.