ECON 305 Lecture Notes - Lecture 9: Reservation Price, Market Power, Economic Surplus
11 Dec 2014
School
Department
Course
Professor
Document Summary
Utility derived from eating a scoop of ice-cream = u(t,t*) = u c | t t*| |t-t*| = distance brand t is from t* c = the rate at which deviation from the optimal brand lowers consumer"s pleasure. When utility is 0 t = t* + u/c. >pleasure of eating a rand of ice cream t. Each consumer wants to maximize its consumer surplus by balancing: Hence we get u(t,t*) p u c | t t*| -p. The utility of the outside good is u hence, consumers buy outside good when: > max(i) u(ti,t*) p. The ideal ice cream is located at t* and has a price p*. Consumer chooses outside good only when: u p* >/= o u-o >/= p* consumers have a reservation price of v= u-o which is the highest price they are willing to pay for that brand of ice-cream. The greater other stores are from your store, the most market power you enjoy.
