ECONOM 1014 Chapter Notes - Chapter 14: Deadweight Loss, Price Discrimination, Arbitrage
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Price discrimination selling the same product at different prices to different customers. This chapter will show how a firm with market power can use price discrimination to increase profit. Note: price discrimination can increase surplus as compared to simple monopoly. In this case below, the more elastic demand (flatter) escapes a higher price. If the monopolist were to choose a world price, they would pick a price in-between. By lowering the price in europe, gsk must be reducing profit in. Similarly, by raising the price in africa, gsk must be reducing profit in. Thus, profit at the single price pworld must be less than when gsk sets two different prices earning the combined profit: profiteurope + profitafrica. If drug smuggling is too overpowering and can"t be stopped, the firm will loose money since smugglers buy from the cheap market and sell at the expensive market. In this case, a world price would be preferred.
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