Price discrimination, game theory and competition policy Flashcards
Price discrimination
charging different prices based on consumer willingness to pay, not on differences in cost.
1st degree price discrimination
monopolist must charge the most anyone is willing to pay for each unit of output. D curve becomes MR curve (as MR shows less value gotten, as lower than Mv, but this equals MV when price accustomed to each consumer. Result is no DWL and all CS becomes PS, P=MC.
2nd degree price discrimination
charges high price for the 1st unit and then reduces price on subsequent units (as when consumers demand multiple units, MV falls per unit) e.g. buy 1, get 2nd half price
3rd degree price discrimination
Placing consumers into groups based on their responsiveness to price (different MV curves) and single price monopoly for each group (consumers with inelastic demand pay > those with elastic demand) e.g. student discount @ movies.
Conditions for perfect price discrimination
- supplier must have some market power (downward D curve, price maker)
- supplier must be able to customer’s MV
- must be no arbitrage possibilities (customer can’t buy low and sell higher)
Game theory
How people behave in strategic situations
Dominant strategy
best strategy for a player to follow regardless of other player’s choices
Nash eqm
economic actors interacting with each other chose their best strategy given the strategies that all other actors have chosen
What does the commerce commission do?
promote competition and restrict behaviour that restricts it
What is the commerce comsission?
An independent govt. agency and established under Commerce Act 1986
Prohibition of competition by CC include:
- company mergers
- industry exit restrictions via using market power
- use of exclusionary clauses
- use of resale price maintenance
- price fixing (collusion)
