Economics Elective 1 Chapter 1 Monopoly Pricing 1.

Conditions for price discrimination

General conditions

1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve

2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos

customers who are willing to pay higher prices

3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price

4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price

discrimination

Conditions for price discrimination

Specific conditionsFor first degree price discrimination

Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay

For third degree price discrimination Aim at put different consumers into different group according to their elasticity

of demand Consumersrsquo price elasticity of demand must be different

For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption

patterns before making different price arrangement

Conditions for price discrimination

Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination

Different price elasticity of demand of consumer is necessary

Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised

Consumers have different information about the market Eg

Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would

likely to pay higher than local residents

Monopoly and anti-competition

In traditional economics lsquoMonopolyrsquo is often labelled as

anti-competitive

harmful to the interest of consumers and society

However economists argue that

monopoly may be anti-competitive

but might not be harmful to the society

Monopoly and anti-competition

Ask yourself

1 Is monopoly necessarily anti-competitive

No the reasons are

Monopoly because of economies of scale

Elimination of weak competitors under normal market competition

Not necessarily anti-competitive but beneficial to the society

Natural monopoly lower average cost so lower price

Dominate the market because of high quality eg MS Windows XP in 2001

Monopoly and anti-competition

Ask yourself

2 Why is monopoly often seen as being anti-competitive and harmful

Monopolists whorsquos dominate the market aimed at more profit

have the ability and

have the incentive to engage anti-competitive practices

great temptation to control the price and output

So monopoly is always suspected of being anti-competitive

Large enterprises may abuse their dominance and hinder

competition

sell products below cost

ask suppliers to stop supplying goods to competitor

Definition of anti-competition

Enterprises use unfair or inappropriate ways to reduce or restrict

market competition

In USA Australia the UK and Singapore

Define ldquoanti-competitionrdquo according to the behaviours of the

enterprises instead of their scales and market shares

Whether they use unfair and inappropriate ways to reduce or restrict

market competition

Definition of anti-competition

Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)

First Conduct Rule

Prohibition of anti-competitive agreements concerted practices and decisions

(1) An undertaking must not ndash

(a) make or give effect to an agreement

(b) engage in a concerted practice or

(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or

effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong

(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash

(a) directly or indirectly fix purchase or selling prices or any other trading conditions

(b) limit or control production markets technical development or investment or

(c) share markets or sources of supply

(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to

an

agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association

of

undertakings (but with any necessary modifications)

(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo

Definition of anti-competition

Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)

Second Conduct Rule

Abuse of market power

(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by

engaging in conduct that has as its object or effect the prevention restriction or distortion of

competition in Hong Kong

(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash

(a) predatory behaviour towards competitors or

(b) limiting production markets or technical development to the prejudice of consumers

(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo