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c
Welfare in case of 3
rd
degree price discrimination
Consumers in high elasticity markets prefer discrimination, in low elasticity markets prefer a
uniform price
Let ( ) ( )
, , , ,
i i i i i i
p q S p p q S p be the prices, outputs and consumers surplus under
discrimination and price uniformity respectively.
i i i
q q q A =
The welfare difference (discrimination-uniformity) is given by
( ) ( ) ( ) ( )
1 1 1 1
,
m m m m
i i i i i i
i i i i
W W S p p c q S p p c q
= = = =
= +
(*)
W is convex with respect to price (per quanto riguarda la parte con S(p)
S(p)=-D(p) S(p)=-D(p)>0 )
Se una funzione convessa
( )
'
( ) ( ) ( )
i i i i i
S p S p S p p p > and
( )
'
( ) ( ) ( )
i i i i i i
S p S p S p p p >
e poich
( ) ( )
'
i i
S p D p = dallequazione (*) seguono i due limiti superiori e inferiori
( )
1
m
i i
i
W W p c q
=
> A
and
( )
1
m
i
i
W W p c q
=
s A
Price discrimination reduces the welfare if
1
m
i
i
q
=
A
=
i
i
q
|
+
\ .
which is strictly less than (1 )
1
4
o + , the total discounted sum of profits when the monopolist leases or sells
with pre-commitment to not lower prices.
Discounted Price
value of paid in
use in 2 period 1
periods
Discounted value
of use in period 2
only minus price
paid in period 2
Durable goods, Coase conjecture and evading the Coase problem(a form of price discrimination)
Formal version of the Coase Conjecture:
- Infinitely lived monopolist with unit cost of production c 0.
- Assume there is a continuum of infinitely lived consumers with unit demand whose
valuation of the durable good (the infinite horizon discounted sum of use value) is
distributed on [c, )
- Prices revised at points of time of interval > 0.
- Discount factor: = e
r
where r is the interest rate.
Conjecture: As 0, the intertemporal (discounted sum of) profit of the monopolist 0
and all prices converge to c. In the limit, almost all trades take place at the initial instant.
Main arguments:
Continuum of consumers implies consumers are price taking.
They decide according to their expectation of future prices which they take as given.
Rational expectations equilibrium:
- consumers anticipate the price path to be chosen by monopolist, take this as given
and buy accordingly;
- given this buying behavior, there should no incentive for the monopolist to deviate
from the price path at any point.
Incentive to wait is lower for higher valuation consumers.
For example, for a consumer whose infinite horizon value of using the good is v the gain
from buying today rather than tomorrow:
(v p
t
) (v p
t+1
) = (1 )v p
t
+ p
t+1
is increasing in v.
If consumer with a certain valuation buys today, all consumers with higher valuation must
have bought by the end of today.
For any fixed > 0, equilibrium price path is nonincreasing over time.
If price increases tomorrow, no one will buy tomorrow.
As becomes extremely small, buyers will wait even if the price declines very slightly and so
the price decline must be extremely small if you want some consumers to buy today rather
than wait.
As 0, if current p >> c, then people anticipate price decline in very near future and wait.
So p c.
- Mitigating factors of Coase conjecture:
- Leasing (see above)
- Pre-commitment (see above)
Make your commitment well known, thus putting your reputation on the line.
Make a monetary contract with someone to increase the benefit of staying on course.
Software programs that block internet access for a predetermined period of time
Limited number of items with destruction of moulds (paintings, sculptures, etc.)
- Asymmetric Information: buyers may not know MC of seller.
Low cost seller can pretend to be a high cost seller, charge a price equal to MC of high cost seller
and earn positive profit that is bounded away from zero (even if interval between price revisions are
close to zero).
- Inflow of new cohorts of buyers
The stock of consumers waiting to buy are on the average of lower valuation than new cohort.
Monopolist has incentive to not lower price too much and sell to higher valuation new consumers,
until the stock of old lower valuation consumers become large and at that point to have a big sale
which, in turn, reduces the stock of consumers sharply and then return to high prices again.
Price cycles.
- Planned Obsolescence:
Reducing durability reduces the quantity of goods carried over and thus convinces buyers that the
price wont fall too much.
Textbook producers frequently bring out new editions to kill used books.
- Money back guarantee - compensate consumers for all future price declines.
Effectively, monopolist pre-commits to not cut price.
Problems in enforcement (secret price cuts, quality improvement etc).
PROBLEM SET N. 1
PROBLEMS ON MONOPOLY AND PRICE DISCRIMINATION: 1-2-3-7-8-9-10-14-15
a) Assegnate le curve della domanda (diretta o inversa) e dei costi calcolare la curva della marginal
revenue, prezzo e output del bene
Problemi 1 -2 -10
b) Calcolare (graficamente e numericamente) CS (Consumer surplus) and Deadweight loss
c) Price discrimination
(i) Diversi mercati: ottimizzare la somma dei profitti per trovare prezzi, output e profitti
Problemi 2- 8
(ii) Discriminazione intertemporale
Problema 3-14 : ottimizzazione semplificata rispetto alla teoria del Tirole (ottimizzare la
somma dei profitti: la dipendenza di q2 e p1 da q1 e p2 assicurata dalla funzione di q2)
(Comportamento naive il consumatore non tiene conto del fatto che i prezzi
diminuirannonel periodo 2)
d) Impresa multi-product
Problema 7 -9
e) Calcolo welfare ricordare la formula W=+CS (=profitto, CS area compresa tra curva della
domanda e il prezzo) se p=a-bq e il prezzo p
m
CS= (a- p
m
) q
m
(dove
q
m
=a- p
m
/b)
Problemi 1- 8-10 (Calcolo anche per mercato competitivo =0