• What is reason rational profit maximizing firms with market power to undertake
ID: 1125784 • Letter: #
Question
• What is reason rational profit maximizing firms with market power to undertake price discrimination? • What conditions must exist for firms with market power to the undertake price discrimination? • Provide an example of a good or industry that undertakes each type of price discrimination (1st degree, 3rd degree, two-part tariff, pure bundling, mixed bundling) • How is a two-part tariff similar to 1st degree price discrimination? How is it different? • How is a two-part tariff similar to perfect competition? How is it different? • How is a 1st degree price discrimination similar to perfect competition? How is it different? • Describe positively correlated and negatively correlated demand • How does positive versus negatively correlated demand relevant for bundling strategies? • Define and compare collusive versus competitive oligopoly, How do they compare with each other and with monopoly in terms of prices, and producer surplus? • Define residual demand and discuss what the of oligopolistic competition it is relevant for • Define best response function or reaction function and how is it relevant for oligopolistic competition? • Describe the best response function or reaction function in a Cournot competition. How does each player’s strategy vary with the other player’s strategy? • Describe the best response function or reaction function in a Bertrand competition. How does each player’s strategy vary with the other player’s strategy?
Explanation / Answer
The price discrimination is the practice to charge different price by the firm with market power to different consumers. There are three types of price initial price discrimination first degree, second degree and third degree. The rationale of price discrimination is to extract as much consumer surplus as possible by the monopolist firm in order to maximize its own profit. In marginal cases the firm is able to extract all of the consumer surplus at equilibrium price from the consumers.
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A firm to price discriminate successfully, must satisfy three conditions:
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The first degree price discrimination occurs when a firm charges different prices for each unit consumed. The example of real life first degree price discriminating firm is rare. But sometimes clothing stores allows different levels of discount for each incremental piece of cloth such as shirts and trousers.
The second degree price price discrimination occurs when firm charges different price for different level of consumption. The real life example is giving discounts for single and bulk purchase.
The third degree price discrimination is charging different price to different group of consumer with different demand. The real example is membership fee for golf club for serious golfer and casual golfer.
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