Term 1 week 8 Flashcards
What is second degree price discrimination?
Second Degree / indirect price discrimination is where prices are based some observable characteristic when purchased eg volume. Which is correlated with their preferences.
-The monopolist does not have any knowledge of the demand functions of each group
-For each kind of consumer a new bundle is designed so the bundle to which that consumer is directed to, is chosen by them.
What is the major difference between second and third degree price discrimination
In third degree you know there are two groups and you know demand functions.
In 2nd degree you do not know the demand functions and cannot identify. However, use self selection methods to self-reveal what group they are in.
What is incentive compatibility in second-degree price discrimination
For each consumer a different bundle is designed. So that the bundle that is designed for that consumer will take it.
If designed for type 1 type 2 has no incentive to buy that.
What are real examples of second-degree price discrimination?
-Buy one get one free pizzas
-Wholesale bulk buying
What are types of second-degree price discrimination?
-Non-linear pricing
-Two part tariffs
What is non-linear pricing an example of and what is it?
-Non linear pricing is an example of second degree price discrimination
-It is when price is not proportional to quantity. Eg bulk buying decreases price per unit
What is the framework of the non-linear pricing model?
How do we set up the profit of the firm
Suppose two types of consumers high demand type and low demand type.
Consumers utility function
= thetaV(Q) - T(Q)
where theta is the type
and V(Q) is the utility from that quantity and T(Q) is the cost from that quantity
THE MC OF THE MONOPOLIST IS CONSTANT AND = C
theta h > theta l > 0
A proportion lamda are type l and proportion 1-lamda are type h
A monopolist offers two bundles:
(q1, T1) and (q2, T2) directed at L and H respectively
(ASSUMPTION) THEY WANT TO SERVE BOTH GOODS
Monopolist profit function is a weighted average of profit of low type and high type.
They want to max this S.T
Individually rationality constraint
Incentive compatibility constraint
What is the individually rationality constraint?
What is it known as well?
What is the mathematical version
It means that both groups will want to participate in the market
Participation constraint
thetalowV(q1) - T1 greater than or equaled to 0
This means that both groups wll particiapte in the market as the high demand type will also buy this bundle and the low type are getting a non-zero utility.
What is the incentive compatibility constraint?
What is the mathematical explanation?
Who is this mainly for?
-Each consumer will only select the bundle that is designed for them.
-High type will not choose low type bundle
-thetahV(Q2) - T(Q2) greater than or equaled to thetahV(Q1) - T(Q1)
Mainly for high type as the low type would never pose as high type as they have to pay more.
What is important to do when profit maximisation of non-linear pricing
Why is this?
MUST MENTION THAT IT HOLDS WITH EQUALITY
This is because the producer can keep increasing the price to increase profits.
Work through a non-linear pricing example with numbers
How do you solve it?
How do you compare the per unit cost?
You first simplify the IR and IC to get it in terms of T1 and T2
Then you sub it in profit maximisation problem and then F.O.C for Q1 and Q2
Then you get the q1 and q2 what they are equal to
You then get T1 and T2 and use q1 and q2 to find per unit
What is the most important thing when doing non-linear pricing problems?
You must outline individual rationality and individual compatiblity and show they are equal in profit max
What are two part tariffs?
What is the two part tariff set up?
Assume constant marginal cost
Assume all consumers have similar demand curve
Why does a two-part tariff monopolist charge the low access fee and not the high-access fee?
Why is this better?
As if high demand access fee is charged there will be no demand for low access type as they cannot afford it.
As if they only charged a high access fee, they may get less than also getting the units from the low access fee.
