6 I shall use my Power

Pricing with Market Power

• given: monopoly which has market power
  • market power → ability to influence price

Conditions for Price Discrimination

• monopoly
• knowledge of individual reservation prices
• possibility of enforcing individual prices
• prevention of reselling (arbitrage)
  • e.g. Brazil Diapers
  • e.g. arbitrage sports betting
  • if arbitrage reselling cannot be mitigated no price setting is possible

How to Decide

Inputs

• market power → monopoly
• limits of market power (consumer behavior)

Optional Firm Behavior

Discrimination (multiple markets, 1 product)

• Price Discrimination

Example 3rd degree discrimination

$P_{NY}=240-4Q_{NY},P_{LA}=200-2Q_{LA}$ $MC=40$ #wontfix type this out

Info

where does the 2 ($2\ast -2Q_{NY}$ and $-2Q_{LA}$) come from? from differentiating the $Q^2$ of marginal revenue to $2Q$

only 1 price for all markets:

• take MR function in which all markets are willing to pay
• set MR = MC
• get combined Q* → then get combined p*
  • p* should be between p_1* and p_2*

Two-Part Tariffs

• Two-Part Tariffs

Combinations (1 market, multiple products)

• separate pricing
  • different prices in different markets
• pre-bundling + Tying
• mixed bundling

Large Example at the End

wontfix type out example from picture

Elasticity of

• independent goods ${\epsilon }_{1,2}=0$
  • relative markup is the inverse of the other product
  • product with higher elasticity has lower price
• complements ${\epsilon }_{1,2}<0$
  • monopolist will charge a price lower than in case with independent goods
• substitutes ${\epsilon }_{1,2}>0$
  • monopolist will charge a higher price than in case with independent goods