Exercises: Pricing/monopoly/price-discrimination (simpler)

Exeter BEEM101 students, 2020: please do these exercises before the midterm.

Suggested answers are now available in the usual location

5.13 OR 7.1: Double Margins (all parts)

Exeter BEEM101 students:

  • Extended answer HERE (class notebook)

  • Recording HERE covers double-markups for a case of unit demand, extending the case given in O-R to show the loss from having the two levels of uniform price monopoly.

  • Here I cover the downward-sloping demand case for double markups; apologies that i seem to be blocking the camera in parts.

5.14 Welfare loss of monopoly: Discussion question from a prior exam

  • Depict and discuss the welfare costs of monopoly power as a ‘market failure’. What are some factors that may lead estimates of these costs to be higher or lower?

Solution help:

See especially the section The deadweight loss of monopoly and accompanying discussion in the NS text.

You should identify the DWL of monopoly as a reduction in top-level (allocative) efficiency. Please discuss this clearly and in your own words, showing your understanding.

  • Will price discrimination reduce or increase the welfare cost of monopoly. Discuss.

Solution help:

‘Perfect’ price discrimination reduces the welfare loss, but is a theoretical ideal, not a realistic real-world practice. See here; illustrate this in a simple diagram.

2dpd and 3dpd may increase or reduce the welfare cost of monopoly (i.e., reduce or increase welfare relative to a single-price monopoly). There is a tradeoff between a reduction in exchange efficiency and a possible increase in output which would imply an increase in alloctive efficiency. See extensive discussion of 3dpd here and in linked readings. State and explain this in your own words.