6.2 Regulation and Price Discrimination

6.2 Regulation and Price Discrimination

6.2.1 Regulatory Options

6.2.2 Price Discrimination

6.2.3 Summary

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?

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

2. Lump sum Tax

P

Q

AR = D

Pe

Qe

MR

ATC

MC

ATC1

3. Per Unit Tax

P

Q

AR = D

Pe

Qe

MR

ATC

MC ATC1

MC1

Qt

Pt

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

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

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

First Degree Price Discrimination

AR = D

MR

ATC

MCP

Q

Pe

Qe

Ppd

Qpd

Second Degree Price Discrimination

AR = D

MR

ATC

MCP

Q

Pe

QeQ1

P1

Third Degree Price Discrimination

Foreign DomesticMRf

ARf

MRd

ARd

MC

Pd

Qd

Pf

Qf

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