Economic Policy - Regulation of Firms Flashcards
Why can a monopoly be harmful?
It was suggested that a monopolist (or firms in a collusive oligopoly)
would set an ‘excessive’ price, taking advantage of their dominant
position in the market.
If this is considered to be ‘unfair’ or unduly harmful to consumers
then there could be an argument for government regulation.
Regulation
Governments typically address the above risk by two means: (2)
What is authority attentive to?
Governments typically address the above risk by two means -
- competition policy
- price regulation.
Where a monopoly is allowed to exist, the government (or a regulatory sub-agency) might…
What are examples of this?
Where a monopoly is allowed to exist, the government (or a regulatory sub-agency) might set the actual price or a maximum price that can be charged.
Examples of this include the privatized utilities in the UK (water, electricity, gas, railways, buses)
Price discrimination occurs when…
In order for a firm to charge different prices it must be able to __________ _________ (prevent _________).
For example, suppose that a firm offered its good for 20 to customer A and 10 to customer B. B might sell the good to A for 15 and then buy another, with both customers making a gain of _, while the firm receives the lower price for both units.
Price discrimination occurs when a firm charges different prices to different customers.
In order for a firm to charge different prices it must be able to separate customers (prevent arbitrage).
For example, suppose that a firm offered its good for 20 to customer A and 10 to customer B. B might sell the good to A for 15 and then buy another, with both customers making a gain of 5, while the firm receives the lower price for both units.
What is arbitrage?
the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset
Market segmentation refers to a situation in which a ____ is able to divide/segment the ________(in terms of ________) and prevent _________ between different ________
Market segmentation refers to a situation in which a firm is able to divide/segment the market (in terms of customers) and prevent arbitrage between different segments
Segmentation might be ‘natural’, such as the difference between …
Alternatively, segmentation might be ________, such as electronic downloads which are validated for an individual account.
Segmentation might be ‘natural’, such as the difference between rush-hour commuters and leisure travellers.
Alternatively, segmentation might be imposed, such as electronic downloads which are validated for an individual account.
First Degree Price Discrimination (what is it)
(Formula)
If a firm sets a single, common price p then every consumer for whom
SVi ≥ p will choose to purchase the good.
Suppose that a firm knew the subjective valuations of each consumer
and was able to completely segment the market. It could then charge
pi = SVi ≥ p.
Second-Degree Price Discrimination (what is it)
2 ways?
If it is not possible/desirable to engage in first-degree price discrimination then an alternative is to provide consumers with different options, such that they choose to pay different prices.
Quantity - it is common to offer bulk discounts, whereby the price is lower if the customer purchases a minimum quantity (N.B. the choice is then made by the customer).
Quality - firms might offer various ‘qualities’ of product, with a non-linear relationship to pricing. For example, the AMD RX6900XT has a benchmark score of 285, while the AMD RX6800XT has a benchmark score of 276. The RX6800XT has a suggested price of $649, while the RX6900XT has a suggested price of $999
.
Third-Degree Price Discrimination
Difference between this and 2nd degree PD?
What is it?
Second-degree price discrimination relied on ‘self-segmentation’ into
different groups of customers. Third-degree price discrimination
involves charging different prices for different groups of customers, with the grouping (segmentation) determined by characteristics other than subjective valuations.
In the case of second- degree price discrimination it could be
argued that there is _________ ____________and so the customer is getting something for the higher price and/or that the customer is choosing which ______to pay, so is not being ‘___________’
In the case of second- degree price discrimination it could be
argued that there is product differentiation and so the customer is getting something for the higher price and/or that the customer is choosing which price to pay, so is not being ‘exploited’
