University:
Massachusetts Institute of Technology
Course:
15.501/516 | Accounting
Academic year:

2023
Views:

358

Pages:

4
Author:

Essence Bridges

APPLIED ECONOMICS FOR MANAGERS SESSION 7— I. REVIEW: THE MONOPOLY PROBLEM A. THE DEADWEIGHT LOSS OF MONOPOLY 1. MONOPOLY OUTPUT LESS THAN COMPETITIVE OUTPUT 2. INEFFICIENCY: MUTUALLY BENEFICIAL TRADES DON’T TAKE PLACE B. MARGINAL REVENUE < PRICE WHEN ALL CUSTOMERS CHARGED THE SAME PRICE 1. THE “TWICE-AS-STEEP” RULE P − MC 1 = P εD C. HARMONIZATION OF SOCIETY’S AND MONOPOLIST’S INTERESTS 2. A NOTE ON THE LERNER INDEX LI = 1. DEAD WEIGHT LOSS = LOST SOCIAL SURPLUS 2. PROFIT OPPORTUNITY LOST: TRADES WITH SURPLUS FOR THE MONOPOLIST DON’T TAKE PLACE II. PRICE DISCRIMINATION: SORTING & RESALE PREVENTION A. REQUIREMENTS 1. IDENTIFICATION: WHO IS WHO ON THE DEMAND CURVE? 2. NO RESALE—NO ARBITRAGE B. PRICE DISCRIMINATION IN LINEVILLE C. OTHER PRICE DISCRIMINATION TACTICS: 1. TWO-PART TARIFFS 2. QUANTITY DISCOUNTS 3. MARKET SEGMENTATION 4. BUNDLING COMPETITIVE VS. MONOPOLY $/UNIT DEMAND CONSUMER SURPLUS MARGINAL COST PROFIT QC B. QUANTITY D. THE DEADWEIGHT LOSS OF MONOPOLY 1. SOCIETY’S PROBLEM 2. THE MONOPOLIST’S PROBLEM $/UNIT DEMAND PROFIT WELFARE LOSS MARGINAL COST MARGINAL REVENUE QM QC QUANTITY III. TWO-PART TARIFFS IN DETAIL CONVENTIONAL MONOPOLY PRICING vs A TWO-PART TARIFF AT NOSNOWBA VALLEY SKI RESORT COST OF EACH RIDE UP THE MOUNTAIN IS $2 TYPICAL SKIER’S DEMAND FOR RIDES: P = 12 – Q MR = 12 – 2Q $/UNIT $12 $12.5 $7 $25 $12.5 $2 MC $10 $10 5 $2 10 DEMAND 12 QUANTITY CONVENTIONAL PRICING: CHARGE FOR INDIVIDUAL RIDES P = $7; #RIDES = 5; AND PROFIT = $25 STRICT TWO-PART PRICING: PARTICIPATION FEE = $50 PER RIDE FEE = $2 = MC #RIDES = 10; PROFIT = $50 APPROXIMATE TWO-PART PRICING: LIFT TICKET = $72 PER RIDE FEE = 0 #RIDES = 12; PROFIT = $48 QUANTITY DISCOUNTS AT NOSNOWBA VALLEY SKI RESORTS LOW-DEMAND CONSUMERS P = 12 – Q HIGH-DEMAND CONSUMERS P = 16 – Q $/UNIT $/UNIT $16 $12 $7 $40.5 $12.5 $7 $6 $25 $ 9.5 $40 $12.5 $2 $10 $10 $2 $20 $8 $8 10 9 10 14 POSSIBLE PRICING SCHEME: OFFER ONLY A 10-RIDE TICKET FOR $70 ⇒ LOW DEMAND CONSUMERS WILL BUY THIS PACKAGE AND PAY AN AVERAGE OF $7 PER RIDE. PROFIT = $50 ALTERNATIVE PRICING SCHEME: NOTE: HIGH DEMAND CUSTOMERS CAN ALWAYS BUY A 10RIDE TICKET AT P = $70 AND GET A SURPLUS OF $40. NASHOBA MUST GIVE THESE SKIERS A SURPLUS OF AT LEAST $40 ON ANY OTHER DEAL. SO, . . . ⇒OFFER A 14 RIDE PACKAGE AT $86. HIGH-DEMAND CONSUMERS VALUE 14 RIDES AT $126 AND SO GET A SURPLUS OF $40 ON THIS DEAL. PROFIT = $86 - $28 = $58. AVERAGE PRICE = $6.14.