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RENT SEEKING Using resources to get monopoly power. Firms are willing to spend up to the amount of monopoly profit which could be made, to make a monopoly.

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Presentation on theme: "RENT SEEKING Using resources to get monopoly power. Firms are willing to spend up to the amount of monopoly profit which could be made, to make a monopoly."— Presentation transcript:

1 RENT SEEKING Using resources to get monopoly power. Firms are willing to spend up to the amount of monopoly profit which could be made, to make a monopoly. Loss to society would be monopoly profit (M) plus deadweight loss (D).

2 PATENTS AND MONOPOLY POWER Incentives for innovation versus society’s cost of monopoly. Allowing innovator to recoup costs of research and development. What is an acceptable cost to society to ensure product will be developed ?

3 PRICE DISCRIMINATION Firms divide consumers into two or more groups and pick a different price for each group. One approach is to offer a discount (resulting in a lower price) to some types of consumers.

4 PRICE DISCRIMINATION Price discrimination involving discounts: Discounts on airline tickets for travelers willing to spend Saturday night away from home, Discount coupons for groceries and restaurant food, Manufacturers’ rebates for appliances, Senior citizen discounts, Student discounts

5 PRICE DISCRIMINATION A firm has an opportunity for price discounts if three conditions are met. 1. Market power -- A firm must have some control over its price. 2. Different consumer groups --Consumers must differ in willingness to pay for product or in responsiveness to changes in price. 3. Resale is not possible -- It must be impractical for one consumer to sell the product to another consumer.

6 SINGLE PRICE POLICY VERSUS PRICE DISCRIMINATION d e s Demand Marginal Revenue PricePrice Number of Senior Customers Number of Non- Senior Customers f n c Demand Marg Cost = Average Cost

7 PRICE DISCRIMINATION ADVANTAGE TOTAL PROFIT single price 100 seniors * $5 = $ non- seniors * $5 = $1,500 Total Profit = $1,600 - (400 * $1) = $3 senior price and $6 non-senior price, 280 seniors * $3 = $ non- seniors * $6 = $1,560 Total Profit = $2,400 - (540 * $1) = $1,860

8 Total number of customers increases: Seniors increase from 100 to 280, Non-seniors decrease from 300 to 260, Total number of customers increases from 400 to 540. PRICE DISCRIMINATION ADVANTAGE

9 PRICE DISCRIMINATION AND ELASTICITY OF DEMAND Seniors have more elastic demand for restaurant meals: Lower incomes, More flexible schedules; Assume demand for restaurant meals by non-seniors is inelastic.

10 PRICE DISCRIMINATION AND ELASTICITY OF DEMAND Price increase for non-seniors increases restaurant profit: Inelastic demand : increase in price will increase total revenue, Fewer non-senior customers lowers cost, Increased total revenue with lower cost provides an increased profit.

11 PRICE DISCRIMINATION AND ELASTICITY OF DEMAND Price decrease for seniors increases restaurant profits: Elastic demand: Decrease in price will increase total revenue, More senior customers, higher cost, If demand is very elastic, increase in revenue will exceed increase in costs: profits will increase.


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