6.2 Regulation and Price Discrimination
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Transcript of 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
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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?
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6.2.1 Regulation
If inefficiency exists, need to reduce/remove via regulation
1. Maximum Price Policy
P
Q
AR = D
Pe
Qe
MR
ATC
MC
Pmax
Q1
P = MC or
P = ATC
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2. Lump sum Tax
P
Q
AR = D
Pe
Qe
MR
ATC
MC
ATC1
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3. Per Unit Tax
P
Q
AR = D
Pe
Qe
MR
ATC
MC ATC1
MC1
Qt
Pt
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6.2.2 Price Discrimination
A) Multiplant Production
Firm can produce at two plants but aims to profit max. How?
)(qafCa )(qbfCbCbCaTR so
0
qa
Ca
qa
TR
qa0
qb
Cb
qa
TRbut
qbTR
qaTR
thusqb
Cb
qa
Ca
i.e. MRMCbMCa
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B) Price Discrimination
At the market price consumers get surplus which firms seek to capture
Pe
Qe
P1
Q1
Consumer surplus
How is it captured?
Charge different prices to different consumers
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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
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First Degree Price Discrimination
AR = D
MR
ATC
MCP
Q
Pe
Qe
Ppd
Qpd
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Second Degree Price Discrimination
AR = D
MR
ATC
MCP
Q
Pe
QeQ1
P1
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Third Degree Price Discrimination
Foreign DomesticMRf
ARf
MRd
ARd
MC
Pd
Qd
Pf
Qf
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6.2.3 Summary
Monopoly is highly inefficient as P > MC and plant size incorrect
Monopolists do not have a supply curve
They can extract consumer surplus by using price discrimination
Some regulation reduces this inefficiency