# 6.2 Regulation and Price Discrimination

Document Sample

```					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

```
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
 views: 3 posted: 1/23/2012 language: pages: 12