econ final

price discrimination

charging diff prices to diff consumers for the same good. usually when monopoly. can reduce dwl

1st degree price discriminination

business knows all consumers and charges highest possible price to each

2nd degree price discrimination (most usual)

different prices available to everyone but consumer chooses to reveal self willingness to pay and elasticity with their actions (discount for buyers who buy a lot)

assume consumers buy multiple items (two part tarriff, membership fee + price of each product at Q)

PS = area above MC below D, CS = 0

avg cost of Q items: fee / Q so many items lower cost

3rd degree price discrimination

different prices for different groups with observable differences. diff prices for diff groups w obvious characteristics

some consumers (high WTP) worse off. may or may not reduce DWL. ex. students more elastic demand so price student lower price regular

volume discounts

2nd degree price discrim. customers who buy in bulk recieve special offers

two part tariffs

customer pays flat fee upfront and per unit fee on each item purchased. like vol discount bc more items = reduces avg total cost

bundling

charging a single price for a set of goods or services, rather than individually. This strategy can increase sales by offering products together that are complementary.

graph 2 part tarriff/perfect price discrim example (2nd and 1st degree)

CS = 0

PS = all area above MC and below D = fee = triangle

fee = area above price at Qt

graph third degree price discrimination

MR = MC. add all cases of PS and CS

PS = area of Qm and Qp.

CS = area above PS

oligopoly

industry with small number of producers. not like monopoly or perf competition each firm action affects others’

game theory

each participant in a strategic situation makes decisions that will impact the outcomes for themselves and others

nash equilibrium

no player wants to unilaterally change their strategy given what other players are choosing

grim trigger and tit for tat

max punishment every time if stolen from

steals one or two back if one stolen

incentivies cooperation

cournot competition assumptions

1. barrier to entry (no third firm enters)

2. standardized product

3. each firm simultaneously chooses quantity

4. based on market demand, price adjusts to sell all units

find BR of each firm given quantity is fixed. unknowns: quantities and solve for NE (this is BR)

cournot total production > monopoly but < perfect competition

bertrand competition assumptions

1. barrier to entry

2. standardized product

3. each firm simultaneously chooses price

4. firm sells as many units as needed

in NE, P1 = P2 = MC

DWL = 0, PS = 0, CS = all the surplus. if MC is different or firm has fixed costs, equilibrium is a monopoly

continous pricing conditions bertrand doupoly conditionsi

P1 = P2 = C

profit 1 = profit 2 = 0 (no fixed costs)

if price increases no one will buy

if price decreases, profit less than zero because P < MC

MSC

MSB

MSC = MPC + MEC

MSB = MPB + MEB

negative externality

MSC > MPC

MSB = MPB

MPC shifts up to MSC to reduce DWL

DWL in externalities

area between MSB and MSC (both social cost and benefit)

positive externality

MSB > MPB

MSC = MPC

pigouvian tax

area of price from equalized point to price from previous point at Qs (social quantity)

dominant strategy

• if A is better than B no matter what the other player chooses