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Lecture

Monopoly.docx

2 Pages
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Department
Economics
Course Code
ECO100Y1
Professor
James Pesando

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Monopoly & Price Discrimination 1.Publishers set different prices for textbooks in different geographic markets (higher  in North America, lower in Europe) WHY? PRICE DISCRIMINATION Intuition Increases profits by permitting monopolist to sell additional output without lowering  price. Result Monopolist will charge high price to customers with low price elasticity of demand  and low price to customers with high price elasticity of demand Requirement Monopolist must be able to segment its customers If customers with high price elasticity of demand buy at low price and then resell at  high to other customers, price discrimination falls 2.Why do stores issue coupons, in newspapers of flyers or on the web, which permit  buyers to obtain a price discount? PRICE DISCRIMINATION Charging different prices for different participants  Buyers who use coupons: high elasticity of demand (elastic) (buy at discounted,  lower price) Buyers who do not use coupons: low elasticity of demand (inelastic)(buy at full,  higher price) 3.Why is Monopoly “Bad”? ­1. Allocatively inefficient (due to reduced output) ­2. Not Monopoly profits Monopolist’s profit? 1. If consumer pays $1 more to producer as a result of monopoly price: Consumer worse off by $1 Producer better off by$1 2. Transfer from consumer to producer ­is consumer more deserving? ­is producer more deserving? ­who decides?         3. Welfare cost of monopoly is loss in total surplus as output is reduced (Allocative Efficien
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