上海交通大学安泰课件 中微 中微 Vrin_Chpter25_Monopoly_ehvior

1、25,Monopoly Behavior,How Should a Monopoly Price?,So far a monopoly has been thought of as a firm which has to sell its product at the same price to every customer. This is uniform pricing. Can price-discrimination earn a monopoly higher profits?,Types of Price Discrimination,1st-degree: Each output

2、 unit is sold at a different price. Prices may differ across buyers. 2nd-degree: The price paid by a buyer can vary with the quantity demanded by the buyer. But all customers face the same price schedule. E.g., bulk-buying discounts.,Types of Price Discrimination,3rd-degree: Price paid by buyers in

3、a given group is the same for all units purchased. But price may differ across buyer groups.E.g., senior citizen and student discounts vs. no discounts for middle-aged persons.,First-degree Price Discrimination,Each output unit is sold at a different price. Price may differ across buyers. It require

4、s that the monopolist can discover the buyer with the highest valuation of its product, the buyer with the next highest valuation, and so on.,First-degree Price Discrimination,p(y),y,$/output unit,MC(y),Sell the th unit for $,First-degree Price Discrimination,p(y),y,$/output unit,MC(y),Sell the th u

5、nit for $ Later onsell the th unit for $,First-degree Price Discrimination,p(y),y,$/output unit,MC(y),Sell the th unit for $ Later onsell the th unit for $ Finally sell the th unit for marginal cost, $,First-degree Price Discrimination,p(y),y,$/output unit,MC(y),The gains to the monopoliston these t

6、rades are:and zero.,The consumers gains are zero.,First-degree Price Discrimination,p(y),y,$/output unit,MC(y),So the sum of the gains tothe monopolist on all trades is the maximumpossible total gains-to-trade.,PS,First-degree Price Discrimination,p(y),y,$/output unit,MC(y),The monopolist gets the m

7、aximum possible gains from trade.,PS,First-degree price discriminationis Pareto-efficient.,First-degree Price Discrimination,First-degree price discrimination gives a monopolist all of the possible gains-to-trade, leaves the buyers with zero surplus, and supplies the efficient amount of output.,Exam

8、ples of 1st-degree Price Discrimination,Auction of antique Financial aid in universities May not be practical do not know willingness to pay too costly,Non-linear pricing Unit price depends on quantity purchased Bulk discount Setting A seller does not know the willingness to pay by each individual b

9、uyer Consumers marginal willingness to pay declines with quantity,Second-degree Price Discrimination,Setting a uniform price is not optimal Too high a price would lose high volume consumer. Too low a price would lost revenue from low volume consumer. Mechanism： Set price for different volumes to let

10、 consumers identify themselves,Second-degree Price Discrimination,Two consumers Person 1 has low willingness-to-pay Person 2 has high willingness-to-pay Assume 0 MC,An Example,A,quantity,$/output unit,x10,x20,C,B,Charge A for x10 hoping to get person 1 Charge A+B+C for x20 hoping to get person 2 But

11、 person 2 is better off buying x10 and receiving a cs=B Fail to let consumers self-select themselves Profit=2A Can alternatively charge A+C for x20 to identify person 2 profit=2A+C,Second-degree Price Discrimination,A,quantity,$/output unit,x10,x20,C,B,Reduce x10 so A is reduced by a little but C ca

12、n be increased by a lot。Persons 1 and 2 are still identified Profit is higher,Second-degree Price Discrimination,A,quantity,$/output unit,MC(y),x1m,x20,C,B,Profit is maximized at x1m,Second-degree Price Discrimination,2nd-degree discrimination can also occur in the dimension of quality Different pri

13、ces for different seats in a theater Different prices for economy class vs. business class seats in airplanes,Second-degree Price Discrimination,Third-degree Price Discrimination,Price paid by buyers in a given group is the same for all units purchased. But price may differ across buyer groups. Qual

14、ity of goods is the same across groups. Can identify groups but no further identification within that group.,Third-degree Price Discrimination,A monopolist manipulates market price by altering the quantity of product supplied to that market. So the question “What discriminatory prices will the monop

15、olist set, one for each group?” is really the question “How many units of product will the monopolist supply to each group?”,Third-degree Price Discrimination,Two markets, 1 and 2. y1 is the quantity supplied to market 1. Market 1s inverse demand function is p1(y1). y2 is the quantity supplied to ma

16、rket 2. Market 2s inverse demand function is p2(y2).,Third-degree Price Discrimination,For given supply levels y1 and y2 the firms profit is What values of y1 and y2 maximize profit?,Third-degree Price Discrimination,The profit-maximization conditions are,Third-degree Price Discrimination,The profit

17、-maximization conditions are,Third-degree Price Discrimination,and,so,the profit-maximization conditions are,and,Third-degree Price Discrimination,Third-degree Price Discrimination,MR1(y1) = MR2(y2) says that the allocation y1, y2 maximizes the revenue from selling y1 + y2 output units. E.g., if MR1

18、(y1) MR2(y2) then an output unitshould be moved from market 2 to market 1to increase total revenue.,Third-degree Price Discrimination,The marginal revenue common to bothmarkets equals the marginal production cost if profit is to be maximized.,Third-degree Price Discrimination,MR1(y1),MR2(y2),y1,y2,y

19、1*,y2*,p1(y1*),p2(y2*),MC,MC,p1(y1),p2(y2),Market 1,Market 2,MR1(y1*) = MR2(y2*) = MC,Third-degree Price Discrimination,MR1(y1),MR2(y2),y1,y2,y1*,y2*,p1(y1*),p2(y2*),MC,MC,p1(y1),p2(y2),Market 1,Market 2,MR1(y1*) = MR2(y2*) = MC and p1(y1*) p2(y2*).,Third-degree Price Discrimination,In which market

20、will the monopolist cause the higher price?,Third-degree Price Discrimination,In which market will the monopolist cause the higher price? Recall that,and,Third-degree Price Discrimination,In which market will the monopolist cause the higher price? Recall that But,and,Third-degree Price Discriminatio

21、n,So,Third-degree Price Discrimination,So,Therefore, if and only if,Third-degree Price Discrimination,So,Therefore, if and only if,Third-degree Price Discrimination,So,Therefore, if and only if,The monopolist sets the higher price in the market where demand is least own-price elastic.,Examples of 3r

22、d-degree Price Discrimination,Discounts to students, senior citizens Government and private-sector purchasers,Bundling,Willingness to pay for software components,Two Marketing Policies,Sell separately: Word processor: p=100, revenue=200 Speadsheet; p=100, revenue=200 Bundling Set p=220 for the bundl

23、e Revenue=440,Two-Part Tariffs,A two-part tariff is a lump-sum fee, p1, plus a price p2 for each unit of product purchased. Thus the cost of buying x units of product isp1 + p2x.,Two-Part Tariffs,Should a monopolist prefer a two-part tariff to uniform pricing, or to any of the price-discrimination s

24、chemes discussed so far? If so, how should the monopolist design its two-part tariff?,Two-Part Tariffs,p1 + p2x Q: What is the largest that p1 can be?,Two-Part Tariffs,p1 + p2x Q: What is the largest that p1 can be? A: p1 is the “market entrance fee” so the largest it can be is the surplus the buyer

25、 gains from entering the market. Set p1 = CS and now ask what should be p2?,Two-Part Tariffs,p(y),y,$/output unit,MC(y),Should the monopolistset p2 above MC?,Two-Part Tariffs,p(y),y,$/output unit,CS,Should the monopolistset p2 above MC?p1 = CS.,MC(y),Two-Part Tariffs,p(y),y,$/output unit,CS,Should t

26、he monopolistset p2 above MC?p1 = CS.PS is profit from sales.,MC(y),PS,Two-Part Tariffs,p(y),y,$/output unit,CS,Should the monopolistset p2 above MC?p1 = CS.PS is profit from sales.,MC(y),PS,Total profit,Two-Part Tariffs,p(y),y,$/output unit,Should the monopolistset p2 = MC?,MC(y),Two-Part Tariffs,p

27、(y),y,$/output unit,Should the monopolistset p2 = MC?p1 = CS.,CS,MC(y),Two-Part Tariffs,p(y),y,$/output unit,Should the monopolistset p2 = MC?p1 = CS.PS is profit from sales.,MC(y),CS,PS,Two-Part Tariffs,p(y),y,$/output unit,Should the monopolistset p2 = MC?p1 = CS.PS is profit from sales.,MC(y),CS,

28、Total profit,PS,Two-Part Tariffs,p(y),y,$/output unit,Should the monopolistset p2 = MC?p1 = CS.PS is profit from sales.,MC(y),CS,PS,Two-Part Tariffs,p(y),y,$/output unit,Should the monopolistset p2 = MC?p1 = CS.PS is profit from sales.,MC(y),CS,Additional profit from setting p2 = MC.,PS,Two-Part Tar

29、iffs,The monopolist maximizes its profit when using a two-part tariff by setting its per unit price p2 at marginal cost and setting its lump-sum fee p1 equal to Consumers Surplus.,Two-Part Tariffs,A profit-maximizing two-part tariff gives an efficient market outcome in which the monopolist obtains a

30、s profit the total of all gains-to-trade.,Two-Part Tariffs,y,$/output unit,If there are multiple consumers with different demands, then optimal price may be higher than MC. In this case, profit=2T*+(p*-MC)(Q1 + Q2) may be higher than 2ABC,MC,B,A,C,Q1,Q2,P*,T*,Rare to see pure monopoly, other firms m

31、ay compete by producing similar products. Implications: The monopolist still has market power demand slopes down Competition from similar products drives profit to zero. To minimize competition, a firm tries to differentiate product.,Monopolistic Competition,Differentiating Products,In many markets

32、the commodities traded are very close, but not perfect, substitutes. E.g., the markets for T-shirts, watches, cars, and cookies. Each individual supplier thus has some slight “monopoly power.” What does an equilibrium look like for such a market?,Differentiating Products,Free entry zero profits for

33、each seller.,Differentiating Products,Free entry zero profits for each seller. Profit-maximization MR = MC for each seller.,Differentiating Products,Free entry zero profits for each seller. Profit-maximization MR = MC for each seller. Less than perfect substitution between commodities slight downwar

34、d slope for the demand curve for each commodity.,Differentiating Products,Price,QuantitySupplied,Demand,Slight downward slope,Differentiating Products,Price,QuantitySupplied,Demand,MarginalRevenue,Differentiating Products,Price,QuantitySupplied,Demand,MarginalRevenue,MarginalCost,Differentiating Pro

35、ducts,Price,QuantitySupplied,Demand,MarginalRevenue,MarginalCost,y*,p(y*),Profit-maximizationMR = MC,Differentiating Products,Price,QuantitySupplied,Demand,MarginalRevenue,AverageCost,MarginalCost,y*,p(y*),Profit-maximizationMR = MC,Zero profitPrice = Av. Cost,Differentiating Products,Such markets a

36、re monopolistically competitive. Are these markets efficient? No, because for each commodity the equilibrium price p(y*) MC(y*).,Differentiating Products,Price,QuantitySupplied,Demand,MarginalRevenue,AverageCost,MarginalCost,y*,p(y*),Profit-maximizationMR = MC,Zero profitPrice = Av. Cost,MC(y*),Diff

37、erentiating Products,Price,QuantitySupplied,Demand,MarginalRevenue,AverageCost,MarginalCost,y*,p(y*),Profit-maximizationMR = MC,Zero profitPrice = Av. Cost,MC(y*),ye,Differentiating Products,Each seller supplies less than the efficient quantity of its product. Also, each seller supplies less than th

38、e quantity that minimizes its average cost and so, in this sense, each supplier has “excess capacity.”,Differentiating Products,Price,QuantitySupplied,Demand,MarginalRevenue,AverageCost,MarginalCost,y*,p(y*),Profit-maximizationMR = MC,Zero profitPrice = Av. Cost,MC(y*),Excesscapacity,ye,Differentiat

39、ing Products by Location,Think a region in which consumers are uniformly located along a line. Each consumer prefers to travel a shorter distance to a seller. There are n 1 sellers. Where would we expect these sellers to choose their locations?,0,Differentiating Products by Location,If n = 1 (monopo

40、ly) then the sellermaximizes its profit at x = ?,1,x,0,Differentiating Products by Location,If n = 1 (monopoly) then the sellermaximizes its profit at x = and minimizes the consumers travel cost.,1,x,0,Differentiating Products by Location,If n = 2 (duopoly) then the equilibrium locations of the sell

41、ers, A and B, are xA = ? and xB = ?,1,x,0,Differentiating Products by Location,If n = 2 (duopoly) then the equilibrium locations of the sellers, A and B, are xA = ? and xB = ? How about xA = 0 and xB = 1; i.e. the sellers separate themselves as much as is possible?,1,x,A,B,1,0,Differentiating Produc

42、ts by Location,If xA = 0 and xB = 1 then A sells to all consumers in 0,) and B sells to all consumers in (,1. Given Bs location at xB = 1, can A increase its profit?,x,A,B,1,0,Differentiating Products by Location,If xA = 0 and xB = 1 then A sells to all consumers in 0,) and B sells to all consumers

43、in (,1. Given Bs location at xB = 1, can A increase its profit? What if A moves to x?,x,A,B,x,1,0,Differentiating Products by Location,If xA = 0 and xB = 1 then A sells to all consumers in 0,) and B sells to all consumers in (,1. Given Bs location at xB = 1, can A increase its profit? What if A move

44、s to x? Then A sells to all customers in 0,+ x) and increases its profit.,x,A,B,x,x/2,1,0,Differentiating Products by Location,Given xA = x, can B improve its profit by moving from xB = 1?,x,A,B,x,1,0,Differentiating Products by Location,Given xA = x, can B improve its profit by moving from xB = 1?

45、What if B moves to xB = x?,x,A,B,x,x,1,0,Differentiating Products by Location,Given xA = x, can B improve its profit by moving from xB = 1? What if B moves to xB = x? Then B sells to all customers in (x+x)/2,1 and increases its profit. So what is the NE?,x,A,B,x,x,(1-x)/2,1,0,Differentiating Product

46、s by Location,Given xA = x, can B improve its profit by moving from xB = 1? What if B moves to xB = x? Then B sells to all customers in (x+x)/2,1 and increases its profit. So what is the NE? xA = xB = .,x,A sellers A, B and C?,x,1,0,Differentiating Products by Location,What if n = 3; sellers A, B an

47、d C? Then there is no NE at all! Why?,x,1,0,Differentiating Products by Location,What if n = 3; sellers A, B and C? Then there is no NE at all! Why? The possibilities are: (i) All 3 sellers locate at the same point. (ii) 2 sellers locate at the same point. (iii) Every seller locates at a different point.,x,1,0,Differentiating Products by Location,(iii) Every seller locates at a different point. Cannot be a NE since, as for n = 2, the two outside sellers get higher