ECON 100 Tutorial 8

1. ECON 100Tutorial 8 Rob Pryce r.pryce@lancaster.ac.uk www.robpryce.co.uk/teaching

2. NEXT WEEK I want you to produce game theory games “Develop a two player normal form game (this can be, but does not have to be Economics related – use your imagination). Select the strategy choices of the players and present the resulting payoffs in a normal form game payoff matrix. Identify any dominant strategies of the players, and identify any Nash equilibria.” You can work in small groups (max 4) or alone. Fill in a payoff matrix for your game (you can use mine or your own). Email it to me, showing me any dominant strategies and any Nash equilibria.

3. Question 1 1st Degree (Perfect) Price Discrimination (c) – when a firm charges each consumer the maximum price they are willing to pay for each unit 2nd Degree Price Discrimination – when a firm offers different prices based on how many units purchased 3rd Degree Price Discrimination (b) – when a firm charges different prices based on customer characteristics

4. Question 2 Legal Issues Could be some form of price regulation – tuition fees for UK students May be illegal to be discriminatory Practical Issues Non-transferable items rather than transferable – railcard tickets must have railcard student discount and student ID Information Issues Does a firm know the maximum willingness-to-pay? Can it even guess reliably?

5. Question 2 CRUCIAL POINT Must have the ability to set prices Perfectly competitive firms do not set prices, so can’t do this

6. Question 3 Perfect Competition P = 12 Q = 8 Monopoly Perfect Competition Monopoly P = 15 Q = 4 Monopoly Profit = TR – TC = (4 x 15) – (4 x 12) = 12

7. Question 3 (cont’d) Monopoly Revenue Before = 4 x 15 = 60 Monopoly Revenue with 1PD (PPD) = (8 x 12) + (8 x 8 / 2) = 96 + 32 = 128

8. Question 3f “Is it 1st degree price discrimination better for society than selling at a single monopoly price?” SINGLE MONOPOLY PRICE Consumer surplus Deadweight loss Producer surplus (profit)

9. Question 3f “Is it 1st degree price discrimination better for society than selling at a single monopoly price?” 1st DEGREE PRICE DISCRIMINATION Producer surplus Consumer surplus? Deadweight loss?

10. Question 4 Source: tutor2u.net

11. Question 4b Economies of Scale are a big barrier to entry If an entrant with the same ATC curve tries to enter, he must charge a price lower than ATC. Which means he would make a loss Under duopoly (two firms), suppose that Qindustry was split so that Q1 = Q2 Qindustry remains unchanged, but ATC1 = ATC2 > ATCm To relate to the diagram, suppose 2 firms produced 100 units each. Their ATC would be higher than 1 firm producing 200. They would also make a loss because the price for 200 units is lower than their average ATC.

12. Average total cost Average total cost Loss Regulated Marginal cost price Demand Question 4c Price Marginal Revenue Quantity 0

13. Question 4c (cont’d) • What’s Good About MC Pricing Policy? • Increases consumer surplus • Reduces price • What’s Bad About MC Pricing Policy? • The monopoly would make a loss • There is no incentive to become more efficient • Any profit from savings is taken away • Same is true of AC pricing

14. Question 5 Should governments or regulators always attempt to eliminate the supernormal profits of monopolists/ oligopolists? What are the benefits of monopoly power? Not always. Some profit is important as an incentive to be more efficient. It may act as a signal for other, more efficient firms to enter and drive down cost. It also gives the incumbent an incentive to reduce costs. In the UK, the RPI-X is followed, which allows monopoly firms to make profits only if they make savings greater than the expected amount (X). Monopolies can produce lower prices, as we saw with q.4.

15. Question 6 Consider the argument that whether an industry is in the public sector or private sector has far less bearing on its performance than the degree of competition it faces Broadly speaking, the degree of competition tends to have more bearing on industry performance. This is why we are seeing greater competition being introduced to the public sector (schools competing for students) rather than a full-scale privatisation of schooling. The same is true in health. The idea is that increased competition means that public sector organisations will have to be more efficient. There may be an argument that since private sector firms can make a profit, there is an extra incentive for them to perform better, but this might have less meaning for a monopoly.

16. NEXT WEEK I want you to produce game theory games “Develop a two player normal form game (this can be, but does not have to be Economics related – use your imagination). Select the strategy choices of the players and present the resulting payoffs in a normal form game payoff matrix. Identify any dominant strategies of the players, and identify any Nash equilibria.” You can work in small groups (max 4) or alone. Fill in a payoff matrix for your game (you can use mine or your own). Email it to me, showing me any dominant strategies and any Nash equilibria. Clear?

17. Any Questions? Office hour: Wednesday, 12:30, Charles Carter C floor Email: r.pryce@lancaster.ac.uk