Econ 201

Price discrimination in practice

- Firms work hard to come up with clever ways to price discriminate There are a myriad of techniques that can work for firms -With increasing technology and information about consumers available, price discrimination is likely to become more common in the future.

Monopolistic Inefficeny and Social Welfare

Because monopolistic competitors produce away from where their average total costs are minimized, they are socially inefficient.

What do markups lead too?

Ineffiency

Excess Capacity

excess capacity occurs when a firm produces less than the level needed to minimize average total costs.

Perfect price discrimination

is a situation in which firms charge each individual buyer that buyer's valuation of the product.

Monopolistic Competiton

is characterized by free entry(ish), many different firms, and product differentiation.

Markup

is the difference between the price the firm charges and the marginal cost of production.

Product Differentation

is the process firms use to make a product more attractive to potential customers.

What does perfect price discrimination cause?

⋄ This causes consumer surplus to be 0. ⋄ Fortunately, firms cannot observe an individual's valuation of a product. ⋄ Bargaining

Advertising across competitive markets? What does it do?

In perfectly competative markets, advertising raises costs without affecting individual demand curves ◮You may be able to increase aggregate demand for corn, but you will get only a tiny fraction of that increase.

Product Differentation methods are?

1. Style or type ⋄ Hot Topic and Gap 2. Location ⋄ Lillis Cafe 3. Quality ⋄ North Face 4. Bonus: Environmental/Social Consciousness ⋄ Fair Trade Coffee

Monopolisitic Competition in Short Run:

1. The demand curve for a monopolistic competitor is downward sloping (like a monopolist) 2. They use MC=MR 3. With production established firm produces, firm sets prices according to the demand curve 4. As in perfect competition, new firms entering the market will reduce the profitability of the existing firms.

3 conditions must occur for price discrimination to work: what are they?

1. The discriminating firm must be a price maker (have market power) 2. There must be distinct groups of buyers Students, elderly people, gender, etc. 3. Buyers of the product must not be able to resell it Green's Fees

Monopolisitc Competiion on the Long Run:

1. When firms can easily enter and exit a market, competition will drive profits to 0. 2. As in competitive settings, firms making a profit will attract new entrants into the market causing demand for each individual firm's products to fall.

Larger markups mean?

Less efficency

Market Power allows what?

Market power allows monopolistically competitive firms to charge slightly higher prices than competitive firms.

Is demand more elastic or inelastic on markups?

Markups are smaller where demand is elastic (relatively flat)

Why do monopolist have little incentive to advertise?

Monopolists have little incentive to advertise because the already control the entire market.

Firm takes loss?

P<ATC

When firms earn profit?

P>ATC

Price Discrimination

Price Discrimination occurs when a firm sells the same good at different prices to different groups of customers. ⋄ Student Rates

What is the goal of advertising?

The goal of advertising is to increase demand for a given product ◮ Furthermore, advertising works to cement brand loyalty and reduce the number of seemingly viable substitutes. ◮ This causes the demand curve to become steeper (less elastic, less responsive to price)

Negative affect of Advertising

The most straightforward drawback of advertising is the cost. Advertising costs increase the ATC curve of the firm.