BECO Exam 3

Fixed and Mixed Bundles

Fixed and Mixed Bundles

fixed are specific combos, while mixed bundles offer possibility of the bundle or separate

Effect of Price is caused by purchasing power by:

• Charging a higher price and no one buys the stocks

  • Restrict the amount of product put in the market and therefore it’s going to get bid up to a higher price

Marginal Revenue

Is the tradeoff in revenues as prices are adjusted

π (Maximizing Profit) =

p(q)q + p(q)

MR will always be 2x as steep as the

Demand Curve

MR will start in the same intercept as the

Demand Curve

MC will always be 2x as steep as the

Supply Curve

3 Things to thinking about w/ Market Power

1. Business love market power as long as they get to be the monopolist

2. Consumers hate monopoly’s

3. The potential to have deadweight loss, that’s going to shrink the size of people who buy

Natural Monopoly

• High FC ( Fixed Cost) & Low MC (Marginal Cost)

• an industry where it makes sense to only have one producer or one firm

Competitive Characteristics

• Won’t be making profits

• Be taking losses

• if the price is below ATC

• firm exit in the long run

• Maximum output

  • Price = MC

Monopoly Characteristics

• MR is twice as steep compared to Demand Curve

• Restrict quantity to charge a higher price or charge higher prices and not sell as much

• Consumers suffer, Deadweight Loss (DWL)

  • Firm earns large π (profits)

How low a price would firms take & still stay in business in the long run?

Price = Average Total Cost (ATC)

What prevents entry into a monopolist market?

• Trademarks

• Patents

• Copyrights

• Government License

• Costs

• The # of availability of substitutions

If the blue box is bigger than the red box

Firm would make more money and should raise prices

If the blue box is smaller than the red box

Firm would lose money and shouldn’t raise prices

What is the scenario for the red box to be bigger than the blue box?

Elastic Demand Curve

Price Discrimination

4 Degrees

Ways to manipulate the price to increase producer surplus (profits)

First Degree (Perfect)

• Individual-specific prices

• Going to charge a different price to different customers or different units of the product

• Try to find a price close to the demand curve where consumer surplus is 0

• Requires detailed information about demand, or a method of eliciting it (auction)

Second Degree

• Volume discounts

• allows producers to capture more consumer surplus on smaller orders

• size of purchase related to costs

• charge a different price for different quantities purchased

  • lower prices for larger quantities

Third Degree

• Group Discounts

• allows producers to capture more consumer surplus from high-value consumers

• how can firms distinguish between groups?

  • need to have a verifiable characteristics

• charge a different price for different groups purchasing products

  • ex: student discounts

Fourth Degree (none)

Uniform Prices

Two Part Tariff

• per unit charge (entrance fee)

• fixed charge (usage fee)

Economics of Scale

• gets cheaper to produce more units

• Decreasing ATC

Economics of Scope

• cheaper to produce two products together than separately

Monopoly

single producer of a product

Maximized profits come out of consumer surplus which creates

Deadweight Loss (DWL)

What is a remedy that conserves Consumer Surplus (CS) and minimizes Deadweight Loss (DWL), and assures viability of monopoly in long run?

Average Cost Pricing

What are economic profits held to in average cost pricing

0

Monopsony

Single buyer of product wants to keep price low

What do you set the marginal input cost equal to in order to determine the quantity, then pay marginal cost for that quantity?

Marginal Willingness to Pay (MWTP)

Bilateral Monopoly

• Final price determined by negotiation and bargaining power

• When a monopolist and monopsonist meet

  • buying an aircraft carrier

Vertical Integration

can avoid double marginalization and increase profits while increasing Consumer Surplus

Monopolistic Competition

model here is many firms with differentiated products

What does the optional price ration depend on

• Elasticities

• Higher price for lower elasticity group

Intertemporal Price Discrimination

Only demand differs, costs are the same at both times (happy hour)

Peak Load Pricing

charging a high price during demand peaks, and a lower price during off-peak time periods.

A perfect two part tariff

achieves perfect price discrimination, but would have to know how to set the fee for each customer

Bundling

by selling products together, firms may be able to increase profits

Implementing Bundling

firm needs to estimate the values of products separately and together, and the costs of producing products separately and together

Markup Equation

P-MC

______

P

Price Skimming

a pricing policy whereby a firm charges a high introductory price, often coupled with heavy promotion

• iphones and cars