3.4.5 Monopoly Flashcards
what is meant by price discrimination
when a seller charges different prices to diff. customers for the same product
condition for using price discrimination
- monopolists have market power -> can charge diff. prices
- firms must be able to distinguish separate groups of customers who have diff. PEDs
- firms must be able to prevent seepage -> i.e. prevent consumers who have bought a product at a low price re-selling it themselves at a higher price to customer who could have charged more
what are the costs and benefits of price discrimination for CONSUMERS?
COSTS:
- price discrimination -> loss of consumer surplus -> P>MC; loss of allocative efficiency -> strengthens monopoly power for firms -> higher prices in the LR for consumers
- perceived unfairness -> consumers may feel exploited
- market segmentation -> some consumers may pay higher prices unnecessarily
BENEFITS:
- benefit from a net welfare gain due to cross subsidisation (revenue from higher prices charged to consumers with inelastic demand can subsidise lower prices for others) if they receive a lower price
- increased access to goods + services for groups with more elastic demand
- firms may benefit from EoS -> lower AC -> lower prices
what are the costs and benefits of price discrimination for PRODUCERS?
COSTS:
- if used as a predatory pricing tactic, firms may face investigation
- seepage may occur - consumers may resell at a higher price
- high adminstrative costs to divide the market
BENEFITS:
- more revenue and profits: charging based on PED -> firms capture consumer surplus -> turn it into producer surplus -> improves profit margins -> stimulates investment -> can improve quality of services
- firms can better sell excess capacity by targeting groups with elastic demand -> lower AC due to better utilisation of fixed assets
- EoS -> more sales + revenue -> higher output -> spreads fixed costs more efficiently -> less AC
- barriers to entry -> firms can use limit pricing -> deters new entrants -> maintains profitability
what is a legal monopoly vs a natural monopoly
legal -> at least 25% market share
natural -> occurs when the most efficient no. of firms in the industry = 1
arguments against monopoly power
- loss of allocative efficiency -> prices are higher -> lack of competiton -> P>MC -> regressive impact for low-income households -> welfare loss
- lack of competition -> less consumer choice -> firms get complacent -> potential X-inefficiency e.g. wasteful advertising spending
- monopoly may get too large -> DisEoS in the LR -> loss of productive efficiency
arguments in favour of monopoly power
- profit gained -> fund extra capital investment -> more innovation -> improved quality of goods and services
- price discrimination may benefit lower-income households
- dominant firm -> benefit from EoS -> lower AC -> lower prices -> good for consumers -> consumer surplus up
- monopoly can be regulated to protect consumers
what is meant by dual-pricing and how does it affect consumer welfare
(diff. loyal customers are charged more than new customers -> exploits imperfect information and consumer inertia -> converts consumer surplus into revenue -> welfare loss
aims of price discrimination
- increased revenue - extracting consumer surplus and turning it into producer surplus
- **higher profits
- using spare capacity**
costs and benefits of price discrimination to employees
COSTS:
- job insecurity in price-sensitive markets: lower revenue segments may face job losses -> cost-cutting measures in less profitable areas
- wage disparities
- firms may prioritise profit>career retention and development -> less training -> less career growth
BENEFITS:
- job security -> more revenue -> more profits -> reduces risk of layoffs -> financial stability
- higher wages -> more profits -> more able to offer bonus or higher wages
- more profits -> can invest in staff training -> enhancing skillsets -> more productivity
- more profits -> invest in improving working environments + benefits -> more job satisfaction
