Lesson 5

1
MECO 6303 Business Economics

• Lesson 5
• Production Theory.
• Part D
• Price discrimination, natural monopoly

2
Price DiscriminationPerfect discrimination

• What is price discrimination?
• The ability to charge different prices to the
  same consumer or different consumers.
• A perfect discriminator can do this perfectly to
  extract the entire consumer surplus.

P
P1
P2
P3
D
D
Q
Q1
Q2
Q3
0
3
Price Discrimination in Reality

• Its usually second or third order occasionally
  higher order.
• There are many examples
• Movie tickets students, senior citizens,
  matinees
• Airline tickets
• Journal subscriptions
• Health care
• Supermarkets
• Volume discounts
• Monopoly of place

4
Conditions for price discrimination

• There are only two both are necessary take
  the case of only two markets second degree
  price discrimination
• The ability to separate the markets no resale
  can occur
• Different elasticities of demand in the two
  markets
• MR1 MR2 MC
• P1 P2 if E1

5
Different elasticities different prices
P1
P2
MC
D2
D1
MR2
MR1
Q1
Q2
6
Natural Monopoly


ACS
AC
AC
ACM
Q
Q
0
0
QM
QS
QM
ACM 7
Examples of natural monopolies

• Examples are public utilities - water, gas,
  electricity, cable
• Do we need to regulate them?
• What kind of regulation is best?
• MC pricing not sensible for a natural monopoly
• Return on capital what is reasonable.
• Simple monopoly franchising - the renewal problem

End of Part D