Chapter Twenty-Five
Monopoly Behavior
垄断行为
How Should a Monopoly Price?
So far a monopoly has been thought
of as a firm which has to sell its
product at the same price to every
customer,This is uniform pricing.
Can price-discrimination （ 差别定价
） earn a monopoly higher profits?
Structure
First-degree price discrimination
Second-degree price discrimination
Third-degree price discrimination
Bundling
Two-part tariff
Types of Price Discrimination
1st-degree,Each output unit is sold
at a different price,Prices may differ
across buyers.
2nd-degree,The price paid by a
buyer can vary with the quantity
demanded by the buyer,But all
customers face the same price
schedule,E.g,bulk-buying
discounts.
Types of Price Discrimination
3rd-degree,Price paid by buyers in a
given group is the same for all units
purchased,But price may differ
across buyer groups.
E.g.,senior citizen and student
discounts vs,no discounts for
middle-aged persons.
First-degree Price Discrimination
Each output unit is sold at a different
price,Price may differ across buyers.
It requires that the monopolist can
discover the buyer with the highest
valuation of its product,the buyer with
the next highest valuation,and so on.
First-degree Price Discrimination
p(y)
y
$/output unit
MC(y)
y
p y( )?
Sell the th unit for $?y p y( ).?
First-degree Price Discrimination
p(y)
y
$/output unit
MC(y)
y
p y( )?
y
p y( )
Sell the th unit for $ Later on
sell the th unit for $
y p y( ).?
y p y( ).
First-degree Price Discrimination
p(y)
y
$/output unit
MC(y)
y
p y( )?
yy
p y( )
p y( )
Sell the th unit for $ Later on
sell the th unit for $ Finally
sell the th unit for marginal
cost,$
y p y( ).?
y p y( ).y
p y( ).
First-degree Price Discrimination
p(y)
y
$/output unit
MC(y)
y
p y( )?
yy
p y( )
p y( )
The gains to the monopolist
on these trades are:
and zero.
p y MC y p y MC y( ) ( ),( ) ( )
The consumers’ gains are zero.
First-degree Price Discrimination
p(y)
y
$/output unit
MC(y)
y
So the sum of the gains to
the monopolist on all
trades is the maximum
possible total gains-to-trade.
PS
First-degree Price Discrimination
p(y)
y
$/output unit
MC(y)
y
The monopolist gets
the maximum possible
gains from trade.
PS
First-degree price discrimination
is Pareto-efficient.
First-degree Price Discrimination
First-degree price discrimination
gives a monopolist all of the possible
gains-to-trade,leaves the buyers
with zero surplus,and supplies the
efficient amount of output.
Examples of 1st-degree Price
Discrimination
Auction of antique
Car sales
Financial aid in universities
May not be practical
–do not know willingness to pay
–too costly
Non-linear pricing
– Unit price depends on quantity
purchased
– Bulk discount
Setting
– A seller does not know the willingness
to pay by each individual buyer
– Consumer’s marginal willingness to pay
declines with quantity
Second-degree Price Discrimination
Setting a uniform price is not optimal
– Too high a price would lose high
volume consumer.
– Too low a price would lost revenue from
low volume consumer.
– Coke example.
Mechanism,Set price for different
volumes to let consumers identify
themselves
Second-degree Price Discrimination
Two consumers
–Person 1 has low willingness-to-
pay
–Person 1 has high willingness-to-
pay
Assume 0 MC
An Example
A
quantity
$/output
unit
x10 x20
C
B
Charge A for x10 hoping to get person 1
Charge A+B+C for x20 hoping to get person 2
But person 2 is better off buying x10 and
receiving a cs=B
Fail to let consumers self-select themselves
Profit=2A
Can alternatively charge A+C for x20
to identify person 2
profit=2A+C
Second-degree Price Discrimination
A
quantity
$/output unit
x10 x20
C
B
Reduce x10 so A is reduced by a little but
C can be increased by a lot。 Persons 1
and 2 are still identified
Profit is higher
Second-degree Price Discrimination
A
quantity
$/output unit
MC(y)
x1m x20
C
B
Profit is maximized at x1m
Second-degree Price Discrimination
2nd-degree discrimination can also
occur in the dimension of quality
Different prices for different seats in
a theater
Different prices for economy class
vs,business class seats in airplanes
Second-degree Price Discrimination
Third-degree Price Discrimination
Price paid by buyers in a given group
is the same for all units purchased,
But price may differ across buyer
groups.
Quality of goods is the same across
groups.
Can identify groups but no further
identification within that group.
Third-degree Price Discrimination
A monopolist manipulates market
price by altering the quantity of
product supplied to that market.
So the question,What discriminatory
prices will the monopolist set,one for
each group?” is really the question
“How many units of product will the
monopolist supply to each group?”
Third-degree Price Discrimination
Two markets,1 and 2.
y1 is the quantity supplied to market 1,
Market 1’s inverse demand function is
p1(y1).
y2 is the quantity supplied to market 2,
Market 2’s inverse demand function is
p2(y2).
Third-degree Price Discrimination
For given supply levels y1 and y2 the
firm’s profit is
What values of y1 and y2 maximize
profit?
(,) ( ) ( ) ( ).y y p y y p y y c y y1 2 1 1 1 2 2 2 1 2
Third-degree Price Discrimination
(,) ( ) ( ) ( ).y y p y y p y y c y y1 2 1 1 1 2 2 2 1 2
The profit-maximization conditions are
y y
p y y
c y y
y y
y y
y1 1 1 1 1
1 2
1 2
1 2
1
0
( )
( )
( )
( )
Third-degree Price Discrimination
(,) ( ) ( ) ( ).y y p y y p y y c y y1 2 1 1 1 2 2 2 1 2
The profit-maximization conditions are
y y
p y y
c y y
y y
y y
y1 1 1 1 1
1 2
1 2
1 2
1
0
( )
( )
( )
( )
y y
p y y
c y y
y y
y y
y2 2 2 2 2
1 2
1 2
1 2
2
0
( )
( )
( )
( )
Third-degree Price Discrimination?
( )y y
y
1 2
1
1( )y yy1 2
2
1and so
the profit-maximization conditions are
y p y y c y yy y
1
1 1 1 1 2
1 2
( ) ( )( )
and
y p y y
c y y
y y2 2 2 2
1 2
1 2
( ) ( )( ),
Third-degree Price Discrimination
y p y y y p y y c y yy y
1
1 1 1
2
2 2 2 1 2
1 2
( ) ( ) ( )( )
Third-degree Price Discrimination
y p y y y p y y c y yy y
1
1 1 1
2
2 2 2 1 2
1 2
( ) ( ) ( )( )
MR1(y1) = MR2(y2) says that the allocation
y1,y2 maximizes the revenue from selling
y1 + y2 output units.
E.g,if MR1(y1) > MR2(y2) then an output unit
should be moved from market 2 to market 1
to increase total revenue.
Third-degree Price Discrimination
y p y y y p y y c y yy y
1
1 1 1
2
2 2 2 1 2
1 2
( ) ( ) ( )( )
The marginal revenue common to both
markets equals the marginal production
cost if profit is to be maximized.
Third-degree Price Discrimination
MR1(y1) MR2(y2)
y1 y2y1* y2*
p1(y1*) p
2(y2*)
MC MC
p1(y1)
p2(y2)
Market 1 Market 2
MR1(y1*) = MR2(y2*) = MC
Third-degree Price Discrimination
MR1(y1) MR2(y2)
y1 y2y1* y2*
p1(y1*) p
2(y2*)
MC MC
p1(y1)
p2(y2)
Market 1 Market 2
MR1(y1*) = MR2(y2*) = MC and p1(y1*)? p2(y2*).
Third-degree Price Discrimination
In which market will the monopolist
set the higher price?
Third-degree Price Discrimination
In which market will the monopolist
cause the higher price?
Recall thatMR y p y1 1 1 1
1
1 1( ) ( )
MR y p y2 2 2 2
2
1 1( ) ( ),
and
Third-degree Price Discrimination
In which market will the monopolist
cause the higher price?
Recall that
But,
MR y p y1 1 1 1
1
1 1( ) ( )
MR y p y2 2 2 2
2
1 1( ) ( ),
and
MR y MR y MC y y1 1 2 2 1 2( ) ( ) ( )* * * *
Third-degree Price Discrimination
p y p y1 1
1
2 2
2
1 1 1 1( ) ( ),* *
So
Third-degree Price Discrimination
p y p y1 1
1
2 2
2
1 1 1 1( ) ( ),* *
So
Therefore,only ifp y p y1 1 2 2( ) ( )* *?
1 1 1 1
1 2
Third-degree Price Discrimination
p y p y1 1
1
2 2
2
1 1 1 1( ) ( ),* *
So
Therefore,only ifp y p y1 1 2 2( ) ( )* *?
1 2 1 2
12
111 1,
Third-degree Price Discrimination
p y p y1 1
1
2 2
2
1 1 1 1( ) ( ),* *
So
Therefore,only ifp y p y1 1 2 2( ) ( )* *?
1 2 1 2
12
111 1,
The monopolist sets the higher price in
the market where demand is least
own-price elastic.
Examples of 3rd-degree Price
Discrimination
Discounts to students,senior citizens
Business travelers and vacationers
Government and private-sector
purchasers
Coupons and rebates
First-run movies and dollar movie
Hardcover books and paperback books
Bundling
Types of
consumers
Word
processor
Spreadsheet
Type A 120 100
Type B 100 120
Willingness to pay for software components
Two Marketing Policies
Sell separately:
–Word processor,p=100,
revenue=200
–Speadsheet; p=100,revenue=200
Bundling
–Set p=220 for the bundle
–Revenue=440
Two-Part Tariffs
A two-part tariff is a lump-sum fee,
p1,plus a price p2 for each unit of
product purchased.
Thus the cost of buying x units of
product is
p1 + p2x.
Two-Part Tariffs
Should a monopolist prefer a two-
part tariff to uniform pricing,or to
any of the price-discrimination
schemes discussed so far?
If so,how should the monopolist
design its two-part tariff?
Two-Part Tariffs
p1 + p2x
Q,What is the largest that p1 can be?
Two-Part Tariffs
p1 + p2x
Q,What is the largest that p1 can be?
A,p1 is the,entrance fee” so the
largest it can be is the surplus the
buyer gains from entering the
market.
Set p1 = CS and now ask what
should be p2?
Two-Part Tariffs
p(y)
y
$/output unit
MC(y)
y
)y(pp 2
Should the monopolist
set p2 above MC?
Two-Part Tariffs
p(y)
y
$/output unit
y
CS
Should the monopolist
set p2 above MC?
p1 = CS.
MC(y))y(pp 2
Two-Part Tariffs
p(y)
y
$/output unit
y
CS
Should the monopolist
set p2 above MC?
p1 = CS.
PS is profit from sales.
MC(y)PS )y(pp 2
Two-Part Tariffs
p(y)
y
$/output unit
y
CS
Should the monopolist
set p2 above MC?
p1 = CS.
PS is profit from sales.
MC(y)PS
Total profit
)y(pp 2
Two-Part Tariffs
p(y)
y
$/output unit
y
)y(pp 2
Should the monopolist
set p2 = MC?
MC(y)
Two-Part Tariffs
p(y)
y
$/output unit Should the monopolist
set p2 = MC?
p1 = CS.
CS
y
MC(y))y(pp 2
Two-Part Tariffs
p(y)
y
$/output unit Should the monopolist
set p2 = MC?
p1 = CS.
PS is profit from sales.
y
MC(y)CS
PS )y(pp 2
Two-Part Tariffs
p(y)
y
$/output unit Should the monopolist
set p2 = MC?
p1 = CS.
PS is profit from sales.
y
MC(y)CS
Total profitPS )y(pp 2
Two-Part Tariffs
p(y)
y
$/output unit Should the monopolist
set p2 = MC?
p1 = CS.
PS is profit from sales.
y
MC(y)CS
PS )y(pp 2
Two-Part Tariffs
p(y)
y
$/output unit Should the monopolist
set p2 = MC?
p1 = CS.
PS is profit from sales.
y
MC(y)CS
Additional profit from setting p2 = MC.
PS )y(pp 2
Two-Part Tariffs
The monopolist maximizes its profit
when using a two-part tariff by
setting its per unit price p2 at
marginal cost and setting its lump-
sum fee p1 equal to Consumers’
Surplus.
Two-Part Tariffs
A profit-maximizing two-part tariff
gives an efficient market outcome in
which the monopolist obtains as
profit the total of all gains-to-trade.
Two-Part Tariffs
y
$/output unit If there are multiple consumers with
different demands,then optimal
price may be higher than MC.
In this case,
profit=2T*+(p*-MC)(Q1 + Q2)
may be higher than 2?ABC
MCB
A
C
Q1 Q2
P* T*
Examples of Two-Part Tariff
Telephone hook-up fee
Membership for a club
It is a special case of 2nd-degree
price discrimination
–The more you buy,the lower the
unit price.
Rare to see pure monopoly,other firms
may compete by producing similar
products.
Implications:
– The monopolist still has market power –
demand slopes down
– Competition from similar products
drives profit to zero.
– To minimize competition,a firm tries to
differentiate product.
Monopolistic Competition (垄断竞争 )
Monopolistic Competition
$/output unit
y
p(y)
y*
p(y*)
AC(y)
Monopolistic Competition
$/output unit
y
MC(y)
p(y)
MR(y)
y*
p(y*)
AC(y)
Monopoly Behavior
垄断行为
How Should a Monopoly Price?
So far a monopoly has been thought
of as a firm which has to sell its
product at the same price to every
customer,This is uniform pricing.
Can price-discrimination （ 差别定价
） earn a monopoly higher profits?
Structure
First-degree price discrimination
Second-degree price discrimination
Third-degree price discrimination
Bundling
Two-part tariff
Types of Price Discrimination
1st-degree,Each output unit is sold
at a different price,Prices may differ
across buyers.
2nd-degree,The price paid by a
buyer can vary with the quantity
demanded by the buyer,But all
customers face the same price
schedule,E.g,bulk-buying
discounts.
Types of Price Discrimination
3rd-degree,Price paid by buyers in a
given group is the same for all units
purchased,But price may differ
across buyer groups.
E.g.,senior citizen and student
discounts vs,no discounts for
middle-aged persons.
First-degree Price Discrimination
Each output unit is sold at a different
price,Price may differ across buyers.
It requires that the monopolist can
discover the buyer with the highest
valuation of its product,the buyer with
the next highest valuation,and so on.
First-degree Price Discrimination
p(y)
y
$/output unit
MC(y)
y
p y( )?
Sell the th unit for $?y p y( ).?
First-degree Price Discrimination
p(y)
y
$/output unit
MC(y)
y
p y( )?
y
p y( )
Sell the th unit for $ Later on
sell the th unit for $
y p y( ).?
y p y( ).
First-degree Price Discrimination
p(y)
y
$/output unit
MC(y)
y
p y( )?
yy
p y( )
p y( )
Sell the th unit for $ Later on
sell the th unit for $ Finally
sell the th unit for marginal
cost,$
y p y( ).?
y p y( ).y
p y( ).
First-degree Price Discrimination
p(y)
y
$/output unit
MC(y)
y
p y( )?
yy
p y( )
p y( )
The gains to the monopolist
on these trades are:
and zero.
p y MC y p y MC y( ) ( ),( ) ( )
The consumers’ gains are zero.
First-degree Price Discrimination
p(y)
y
$/output unit
MC(y)
y
So the sum of the gains to
the monopolist on all
trades is the maximum
possible total gains-to-trade.
PS
First-degree Price Discrimination
p(y)
y
$/output unit
MC(y)
y
The monopolist gets
the maximum possible
gains from trade.
PS
First-degree price discrimination
is Pareto-efficient.
First-degree Price Discrimination
First-degree price discrimination
gives a monopolist all of the possible
gains-to-trade,leaves the buyers
with zero surplus,and supplies the
efficient amount of output.
Examples of 1st-degree Price
Discrimination
Auction of antique
Car sales
Financial aid in universities
May not be practical
–do not know willingness to pay
–too costly
Non-linear pricing
– Unit price depends on quantity
purchased
– Bulk discount
Setting
– A seller does not know the willingness
to pay by each individual buyer
– Consumer’s marginal willingness to pay
declines with quantity
Second-degree Price Discrimination
Setting a uniform price is not optimal
– Too high a price would lose high
volume consumer.
– Too low a price would lost revenue from
low volume consumer.
– Coke example.
Mechanism,Set price for different
volumes to let consumers identify
themselves
Second-degree Price Discrimination
Two consumers
–Person 1 has low willingness-to-
pay
–Person 1 has high willingness-to-
pay
Assume 0 MC
An Example
A
quantity
$/output
unit
x10 x20
C
B
Charge A for x10 hoping to get person 1
Charge A+B+C for x20 hoping to get person 2
But person 2 is better off buying x10 and
receiving a cs=B
Fail to let consumers self-select themselves
Profit=2A
Can alternatively charge A+C for x20
to identify person 2
profit=2A+C
Second-degree Price Discrimination
A
quantity
$/output unit
x10 x20
C
B
Reduce x10 so A is reduced by a little but
C can be increased by a lot。 Persons 1
and 2 are still identified
Profit is higher
Second-degree Price Discrimination
A
quantity
$/output unit
MC(y)
x1m x20
C
B
Profit is maximized at x1m
Second-degree Price Discrimination
2nd-degree discrimination can also
occur in the dimension of quality
Different prices for different seats in
a theater
Different prices for economy class
vs,business class seats in airplanes
Second-degree Price Discrimination
Third-degree Price Discrimination
Price paid by buyers in a given group
is the same for all units purchased,
But price may differ across buyer
groups.
Quality of goods is the same across
groups.
Can identify groups but no further
identification within that group.
Third-degree Price Discrimination
A monopolist manipulates market
price by altering the quantity of
product supplied to that market.
So the question,What discriminatory
prices will the monopolist set,one for
each group?” is really the question
“How many units of product will the
monopolist supply to each group?”
Third-degree Price Discrimination
Two markets,1 and 2.
y1 is the quantity supplied to market 1,
Market 1’s inverse demand function is
p1(y1).
y2 is the quantity supplied to market 2,
Market 2’s inverse demand function is
p2(y2).
Third-degree Price Discrimination
For given supply levels y1 and y2 the
firm’s profit is
What values of y1 and y2 maximize
profit?
(,) ( ) ( ) ( ).y y p y y p y y c y y1 2 1 1 1 2 2 2 1 2
Third-degree Price Discrimination
(,) ( ) ( ) ( ).y y p y y p y y c y y1 2 1 1 1 2 2 2 1 2
The profit-maximization conditions are
y y
p y y
c y y
y y
y y
y1 1 1 1 1
1 2
1 2
1 2
1
0
( )
( )
( )
( )
Third-degree Price Discrimination
(,) ( ) ( ) ( ).y y p y y p y y c y y1 2 1 1 1 2 2 2 1 2
The profit-maximization conditions are
y y
p y y
c y y
y y
y y
y1 1 1 1 1
1 2
1 2
1 2
1
0
( )
( )
( )
( )
y y
p y y
c y y
y y
y y
y2 2 2 2 2
1 2
1 2
1 2
2
0
( )
( )
( )
( )
Third-degree Price Discrimination?
( )y y
y
1 2
1
1( )y yy1 2
2
1and so
the profit-maximization conditions are
y p y y c y yy y
1
1 1 1 1 2
1 2
( ) ( )( )
and
y p y y
c y y
y y2 2 2 2
1 2
1 2
( ) ( )( ),
Third-degree Price Discrimination
y p y y y p y y c y yy y
1
1 1 1
2
2 2 2 1 2
1 2
( ) ( ) ( )( )
Third-degree Price Discrimination
y p y y y p y y c y yy y
1
1 1 1
2
2 2 2 1 2
1 2
( ) ( ) ( )( )
MR1(y1) = MR2(y2) says that the allocation
y1,y2 maximizes the revenue from selling
y1 + y2 output units.
E.g,if MR1(y1) > MR2(y2) then an output unit
should be moved from market 2 to market 1
to increase total revenue.
Third-degree Price Discrimination
y p y y y p y y c y yy y
1
1 1 1
2
2 2 2 1 2
1 2
( ) ( ) ( )( )
The marginal revenue common to both
markets equals the marginal production
cost if profit is to be maximized.
Third-degree Price Discrimination
MR1(y1) MR2(y2)
y1 y2y1* y2*
p1(y1*) p
2(y2*)
MC MC
p1(y1)
p2(y2)
Market 1 Market 2
MR1(y1*) = MR2(y2*) = MC
Third-degree Price Discrimination
MR1(y1) MR2(y2)
y1 y2y1* y2*
p1(y1*) p
2(y2*)
MC MC
p1(y1)
p2(y2)
Market 1 Market 2
MR1(y1*) = MR2(y2*) = MC and p1(y1*)? p2(y2*).
Third-degree Price Discrimination
In which market will the monopolist
set the higher price?
Third-degree Price Discrimination
In which market will the monopolist
cause the higher price?
Recall thatMR y p y1 1 1 1
1
1 1( ) ( )
MR y p y2 2 2 2
2
1 1( ) ( ),
and
Third-degree Price Discrimination
In which market will the monopolist
cause the higher price?
Recall that
But,
MR y p y1 1 1 1
1
1 1( ) ( )
MR y p y2 2 2 2
2
1 1( ) ( ),
and
MR y MR y MC y y1 1 2 2 1 2( ) ( ) ( )* * * *
Third-degree Price Discrimination
p y p y1 1
1
2 2
2
1 1 1 1( ) ( ),* *
So
Third-degree Price Discrimination
p y p y1 1
1
2 2
2
1 1 1 1( ) ( ),* *
So
Therefore,only ifp y p y1 1 2 2( ) ( )* *?
1 1 1 1
1 2
Third-degree Price Discrimination
p y p y1 1
1
2 2
2
1 1 1 1( ) ( ),* *
So
Therefore,only ifp y p y1 1 2 2( ) ( )* *?
1 2 1 2
12
111 1,
Third-degree Price Discrimination
p y p y1 1
1
2 2
2
1 1 1 1( ) ( ),* *
So
Therefore,only ifp y p y1 1 2 2( ) ( )* *?
1 2 1 2
12
111 1,
The monopolist sets the higher price in
the market where demand is least
own-price elastic.
Examples of 3rd-degree Price
Discrimination
Discounts to students,senior citizens
Business travelers and vacationers
Government and private-sector
purchasers
Coupons and rebates
First-run movies and dollar movie
Hardcover books and paperback books
Bundling
Types of
consumers
Word
processor
Spreadsheet
Type A 120 100
Type B 100 120
Willingness to pay for software components
Two Marketing Policies
Sell separately:
–Word processor,p=100,
revenue=200
–Speadsheet; p=100,revenue=200
Bundling
–Set p=220 for the bundle
–Revenue=440
Two-Part Tariffs
A two-part tariff is a lump-sum fee,
p1,plus a price p2 for each unit of
product purchased.
Thus the cost of buying x units of
product is
p1 + p2x.
Two-Part Tariffs
Should a monopolist prefer a two-
part tariff to uniform pricing,or to
any of the price-discrimination
schemes discussed so far?
If so,how should the monopolist
design its two-part tariff?
Two-Part Tariffs
p1 + p2x
Q,What is the largest that p1 can be?
Two-Part Tariffs
p1 + p2x
Q,What is the largest that p1 can be?
A,p1 is the,entrance fee” so the
largest it can be is the surplus the
buyer gains from entering the
market.
Set p1 = CS and now ask what
should be p2?
Two-Part Tariffs
p(y)
y
$/output unit
MC(y)
y
)y(pp 2
Should the monopolist
set p2 above MC?
Two-Part Tariffs
p(y)
y
$/output unit
y
CS
Should the monopolist
set p2 above MC?
p1 = CS.
MC(y))y(pp 2
Two-Part Tariffs
p(y)
y
$/output unit
y
CS
Should the monopolist
set p2 above MC?
p1 = CS.
PS is profit from sales.
MC(y)PS )y(pp 2
Two-Part Tariffs
p(y)
y
$/output unit
y
CS
Should the monopolist
set p2 above MC?
p1 = CS.
PS is profit from sales.
MC(y)PS
Total profit
)y(pp 2
Two-Part Tariffs
p(y)
y
$/output unit
y
)y(pp 2
Should the monopolist
set p2 = MC?
MC(y)
Two-Part Tariffs
p(y)
y
$/output unit Should the monopolist
set p2 = MC?
p1 = CS.
CS
y
MC(y))y(pp 2
Two-Part Tariffs
p(y)
y
$/output unit Should the monopolist
set p2 = MC?
p1 = CS.
PS is profit from sales.
y
MC(y)CS
PS )y(pp 2
Two-Part Tariffs
p(y)
y
$/output unit Should the monopolist
set p2 = MC?
p1 = CS.
PS is profit from sales.
y
MC(y)CS
Total profitPS )y(pp 2
Two-Part Tariffs
p(y)
y
$/output unit Should the monopolist
set p2 = MC?
p1 = CS.
PS is profit from sales.
y
MC(y)CS
PS )y(pp 2
Two-Part Tariffs
p(y)
y
$/output unit Should the monopolist
set p2 = MC?
p1 = CS.
PS is profit from sales.
y
MC(y)CS
Additional profit from setting p2 = MC.
PS )y(pp 2
Two-Part Tariffs
The monopolist maximizes its profit
when using a two-part tariff by
setting its per unit price p2 at
marginal cost and setting its lump-
sum fee p1 equal to Consumers’
Surplus.
Two-Part Tariffs
A profit-maximizing two-part tariff
gives an efficient market outcome in
which the monopolist obtains as
profit the total of all gains-to-trade.
Two-Part Tariffs
y
$/output unit If there are multiple consumers with
different demands,then optimal
price may be higher than MC.
In this case,
profit=2T*+(p*-MC)(Q1 + Q2)
may be higher than 2?ABC
MCB
A
C
Q1 Q2
P* T*
Examples of Two-Part Tariff
Telephone hook-up fee
Membership for a club
It is a special case of 2nd-degree
price discrimination
–The more you buy,the lower the
unit price.
Rare to see pure monopoly,other firms
may compete by producing similar
products.
Implications:
– The monopolist still has market power –
demand slopes down
– Competition from similar products
drives profit to zero.
– To minimize competition,a firm tries to
differentiate product.
Monopolistic Competition (垄断竞争 )
Monopolistic Competition
$/output unit
y
p(y)
y*
p(y*)
AC(y)
Monopolistic Competition
$/output unit
y
MC(y)
p(y)
MR(y)
y*
p(y*)
AC(y)
