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    Perfect price discrimination

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    1- Define and give an example of perfect price discrimination. Explain how price (rate) regulation may improve the performance of monopolies. In your answer distinguish between (a) socially optimal (marginal cost) pricing and (b) fair return (average and total cost) pricing.

    2- How does monopolistic competition differ from pure competition in its basic characteristics? From pure monopoly? Explain fully what product differentiation may involve. Explain how the entry of firms into its industry affects the demand curve facing a monopolistic competitor and how that, in turn, affects its economic profit. Why is there so much advertising in monopolistic competition and oligopoly?

    3- Why do oligopolies exist? List 3 or 4 oligopolists whose products you regularly purchase. What distinguishes oligopoly from monopolistic competition? Why might price collusion occur in oligopolistic industries? Assess the economic desirability of collusive pricing. What are the main obstacles to collusion? Speculate as to why price leadership is legal in the United States, whereas price fixing is not.

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    Solution Preview

    The information provided here includes:
    1. Perfect price discrimination overview
    2. Monopoly pricing
    3. Government regulation of monopolies
    4. Fair price regulation
    5. perfect competition vs monopolisitc competition
    6. Product differentiation
    7. The role of advertising
    8. Existence of oligopolies
    9. Oligopolies vs monopolistic competition
    10. Collusion and Price leadership

    Perfect, or first degree, price discrimination is relatively rare because it requires perfect information regarding each buyer's reservation price. Buyers do not generally provide this information to sellers as it is not in their best interest to do so. Sellers use various techniques to find each buyer's reservation price in some situations. For example, used car dealers will assess buyers based on appearance and speech. They will then ask the highest price they reasonably can, but the buyer will likely negotiate. It is up to the seller to determine how honest the buyer is being in these negotiations. The buyer may start to walk away, the the seller will feel compelled to offer a lower price rather than not make the sale at all. The extent to which the seller knows that that buyer is bluffing determines whether perfect price discrimination can occur.

    In a competitive market, the socially efficient amount of each good is produced when firms equate marginal revenue with price. This is where the cost of the good to society is the same as the benefit society receives from it. When there is a single seller, it faces a downward sloping demand curve, rather than a horizontal one. It can therefore dictate the price, rather than take the price set by the market. Thus monopolies exploit the price mechanism, providing society with less than the socially efficient amount.

    Government regulation has been effective in breaking up and regulating monopolies. There are formulas that can be applied to tell regulators how ...

    Solution Summary

    Perfect price discrimination; distinguishing pure and monopolistically competitive firms; product differentiation; and the existence of oligopolies.