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L18 - Monopoly - 11132013.pdf

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James Pesando

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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 higher price elasticity of demand Requirement: Monopolist must be able to segment (separate) its customers (If customers with high price elasticity of demand buy at “low” price and then resell at “low” price to other customers, price discrimination fails.) Why do stores issue coupons, in newspapers or flyers or on the web, which permit users to obtain a price discount? (Most individuals ignore these coupons) Answer: Price Discrimination Buyers who use coupons: high elasticity of demand (buy at discounted, lower price) Buyers who do not use coupons: low elasticity of demand (buy at full, higher price) Why is Monopoly “Bad”? 1. Allocatively inefficient (due to reduced output) 2. Not Monopoly Profits Monopolist’s Profit? 1. If consumer pay $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 Efficiency: A Further Note 1. The Economic Problem: the Allocation of Sc
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