Monopolistic Competition And Price Discrimination Flashcards
3 main characteristics of monopolistic competition?
Many buyers and sellers Similar product (as perceived by the consumer) Freedom of entry and exit
Why is the demand curve downward sloping in monopolistic competition?
Firms have price setting power (market power)
If firms in monopolistic competition produce at a 0 profit level, why does the market not become perfectly competitive?
Because they produce on the downward sloping bit of the LRATC and tf not the minimum of the AC curve
Define excess capacity?
When a firms output level is too small to minimise cost per unit
Define price discrimination?
The practice of charging different prices to different consumers for homogenous goods
3 conditions required for price discrimination?
Firms should be able to:
Set prices (market power)
Do market segmentation
Prevent reselling/arbitrage
What is first degree (perfect) price discrimination?
When a firm charges each consumer for each unit the maximum price a consumer is willing to pay for a good
What is the reservation price?
The maximum price a consumer is willing to pay for a good
Learn first degree diagram and total revenue
Now
What happens to the MR curve under FDPD?
It becomes the demand curve (swings out) since each additional unit increases the revenue by the price paid
What is second degree price discrimination?
Where a firm charges so much for the first so many units purchased, and a different price for the next so many units purchased, and so on
What is block pricing?
Done in SDPD, when a consumer is charged different price for different ‘blocks’ of a good
Learn SDPD diagram
Now and revenue info
What is third degree price discrimination?
Where a firm divides consumers into different groups and charges a different price to consumers in different groups, but the same price within a group
Learn TDPD diagram?
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