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ECO100 Nov.13 2013.docx

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James Pesando

Article: Justices Weigh Case On Imported Textbooks Publishers set different prices for textbooks in different geographic markets • 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 (separate) its customers (If customers with high price elasticity of demand by 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 buyers to obtain a price discount? (Most individual ignore these coupons) Answer: price discrimination Buyer 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 Profit 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 sur
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