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6.2 Regulation and Price Discrimination

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					6.2 Regulation and Price Discrimination


 6.2.1 Regulatory Options
 6.2.2 Price Discrimination
 6.2.3 Summary
Application
“Microsoft loses anti-trust appeal, 17th September 2007

•Microsoft lost an appeal against a £343 million fine given
in 2004 for abusing its dominant market position
•Microsoft had been bundling Windows operating system
with other packages, notably Media Player
•It had domination in operating systems and was using that
to lever domination in media players too; the makers of
Realplayer complained for example
•Is this an effective punishment though?
                   6.2.1 Regulation
If inefficiency exists, need to reduce/remove via regulation

  1. Maximum Price Policy
                            MC
      P                                   P = MC or
                                  ATC
                                          P = ATC
        Pe
       Pmax


                            MR        AR = D

                  Qe Q1                        Q
2. Lump sum Tax
                       MC
    P
                                 ATC1

                                 ATC
    Pe



                                 AR = D

                            MR

                  Qe                      Q
3. Per Unit Tax
                       MC1
    P                        MC    ATC1


     Pt                            ATC
     Pe



                                   AR = D

                              MR

                  Qt   Qe                   Q
             6.2.2 Price Discrimination
     A) Multiplant Production
Firm can produce at two plants but aims to profit max. How?
  Ca  f (qa) Cb  f (qb)
   TR  Ca  Cb so
  TR Ca                      TR Cb
           0                         0      but
 qa qa qa                     qa qb
  TR TR                Ca Cb
                 thus      
  qa qb                qa qb
                          i.e.   MCa  MCb  MR
  B) Price Discrimination

At the market price consumers get surplus which firms
seek to capture

                       Consumer
 P1                    surplus
                                  How is it captured?
 Pe
                                  Charge different
                                  prices to different
                                  consumers
        Q1 Qe
Requirements for price discrimination:

1. Must be a monopoly
2. Must be able to identify and separate out
different consumers

3. Consumers must have different elasticities of demand

4. No leakages between markets
First Degree Price Discrimination

    P                         MC


     Pe                                  ATC
    Ppd


                                         AR = D
                                    MR

                      Qe Qpd                      Q
Second Degree Price Discrimination

    P                        MC
     P1
                                     ATC
     Pe



                                     AR = D
                                MR
               Q1     Qe                      Q
Third Degree Price Discrimination




                   Pd           ARd

             ARf        Pf              MC
                                MRd

       MRf         Qf        Qd
   Foreign                   Domestic
                6.2.3 Summary


Monopoly is highly inefficient as P > MC and plant
size incorrect
Some regulation reduces this inefficiency
Monopolists do not have a supply curve
They can extract consumer surplus by using price
discrimination

				
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