Topic 4 Flashcards
(26 cards)
Conditions for Profitable Price Discrimination
- Seller is price maker
- Buyers must differ & sellers can identify buyers
- Consumer must not be able to participate in arbitrage
Arbitrage
Low charged buyers purchase then sell to buyer who pays high price
First Degree Price Discrimination
- Sellers charge each buyer max price that buyer willing to pay
- Different prices for different buyers
- May entail different prices per unit for same buyer
- Unlikely in reality
Monopolist with first-degree price discrimination
- Same output as perfect competition
- Produces more than if not discriminates
- Same total welfare as perfect competition
- All gains from trade, no consumer surplus
Third Degree Price Discrimination
- Seller can identify groups of buyers and differ prices
What are groups formed of for 3rd degree Price Discrimination
- Characteristics eg students
- Country eg developed
Effects on market
- Same output as no discrimination
- Lower price for elastic demand
- Positive consumer surplus
- Associated DWL (prices above MC)
Second Degree Price Discrimination
Non-linear tariffs for buyer to reveal preferences when they select preferred tariff
Linear and Non-linear tariffs
Linear - Same price per unit (Low users)
Non-Linear - AP per unit changes (High users)
2 Rules of Profit Maximisation
Marginal Output rule - if firm doesnt shutdow, should produce at MR=MC
Shutdown rule - should shutdown if p<AC at all outputs
Perfect Competition Assumptions
- Buyers are Price Takers
- Sellers and Buyers have complete information
- Sellers are price takers
- Entry is free
Perfect Competition: Size and number of sellers
Many, small
Perfect Competition: Barriers to entry
Low
Perfect Competition: Product Substitutability
Undifferentiated
Perfect Competition: When does Equilibrium occur
Market price determined by supply and demand
Perfect Competition: LR Equilibrium Change
- Variable Factors
- Other sellers can freely enter the market
- Incumbent sellers don’t leave, potential sellers don’t enter
Normal Profit
Monopoly Assumptions
- Buyers are price takers
- Buyers and Sellers have complete information
- Monopolist is price maker
- Entry is blocked
Monopoly: Size and number of sellers
One, Large
Monopoly: Barriers to entry
High
Monopoly: Product Substitutability
Differentiated
Monopoly: What determines Equilibrium
Two rules of profit maximisation
What happens to monopoly price to sell another unit
P falls as AR=D=P
Consumer Surplus
Difference between amount customers are willing to pay and what they actually pay
Producer Surplus
Difference between price of a good and what producers are willing to supply
