Summary
In this second LP on monopolies, we learn about a few more types of monopolies, quite particular ones. We learn about discriminating monopolies, how the implement different prices in order to extract all consumer surplus. We also learn about natural monopolies, which are tricky since they are actually good for society.Discriminating monopoly:
- Price discrimination
- First degree price discrimination
- Second degree price discrimination
- Third degree price discrimination
- Two-part tariff
Natural monopolies:
Second-degree price discrimination, or nonlinear pricing, involves setting prices subject to the amount bought, in an attempt to capture part of the consumer surplus. Revenues collected by the firm in this matter will be a nonlinear function. A bulk sale strategy, such as quantity discounts, will be applied and consumers will choose the block that better suits them.
Consider the adjacent figure: a monopoly will be able to implement this type of price discrimination to a certain consumer by offering discounts for buying a higher quantity. Note that d corresponds to the consumer’s demand curve, not the market’s. By offering a lower price, p2, for quantity q2, the monopoly is able to extract part of the consumer surplus. This price discrimination works similarly to a two-part tariffs. However, in this case, the monopoly won’t charge an entrance fee, but will hide this entrance fee into part of the discounted price offered to the consumer.
