Download - 05. imperfect competion
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ImperfectImperfectCompetitionCompetition
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Imperfect CompetitionImperfect Competition
Monopolistic CompetitionMonopolistic Competition
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MONOPOLISTIC COMPETITIONMONOPOLISTIC COMPETITION
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
MR = MC
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
MR = MC
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£
Q O Qs
AR D
MC
AC
MR
Short-run equilibrium of the firmunder monopolistic competitionShort-run equilibrium of the firmunder monopolistic competition
Ps
ACs
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MONOPOLISTIC COMPETITIONMONOPOLISTIC COMPETITION
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
MR = MC
– long run
MR = MC; AR = AC
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
MR = MC
– long run
MR = MC; AR = AC
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Long-run equilibrium of the firmunder monopolistic competitionLong-run equilibrium of the firmunder monopolistic competition
ARL DL
MRL
£
Q O QL
PL
LRAC
LRMC
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MONOPOLISTIC COMPETITIONMONOPOLISTIC COMPETITION
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
MR = MC
– long run
MR = MC; AR = AC
– under-utilisation of capacity in long run
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
MR = MC
– long run
MR = MC; AR = AC
– under-utilisation of capacity in long run
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Under-utilisation of capacity in the long runUnder-utilisation of capacity in the long run
£
QO
LRAC
DL under monopolistic
competition
Q1 Q2
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• Limitations of the model– imperfect information
– difficulty in identifying industry demand curve
– entry may not be totally free
– indivisibilities
– importance of non-price competition
• The public interest– comparison with perfect competition
• Limitations of the model– imperfect information
– difficulty in identifying industry demand curve
– entry may not be totally free
– indivisibilities
– importance of non-price competition
• The public interest– comparison with perfect competition
MONOPOLISTIC COMPETITIONMONOPOLISTIC COMPETITION
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Q2
P2 DL under perfect
competition
Long run equilibrium of the firm under perfect andmonopolistic competition
Long run equilibrium of the firm under perfect andmonopolistic competition
£
QO
P1
LRAC
DL under monopolistic
competition
Q1
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• Limitations of the model– imperfect information
– difficulty in identifying industry demand curve
– entry may not be totally free
– indivisibilities
– importance of non-price competition
• The public interest– comparison with perfect competition
– comparison with monopoly
• Limitations of the model– imperfect information
– difficulty in identifying industry demand curve
– entry may not be totally free
– indivisibilities
– importance of non-price competition
• The public interest– comparison with perfect competition
– comparison with monopoly
MONOPOLISTIC COMPETITIONMONOPOLISTIC COMPETITION
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Imperfect CompetitionImperfect Competition
OligopolyOligopoly
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OLIGOPOLYOLIGOPOLY
• Key features of oligopoly
– barriers to entry
– interdependence of firms
– incentives to compete versus incentives to collude
• Factors favouring collusion
• Collusive oligopoly: cartels
– equilibrium of the industry
• Key features of oligopoly
– barriers to entry
– interdependence of firms
– incentives to compete versus incentives to collude
• Factors favouring collusion
• Collusive oligopoly: cartels
– equilibrium of the industry
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£
Q O
Industry D AR
Profit-maximising cartelProfit-maximising cartel
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Profit-maximising cartelProfit-maximising cartel£
Q O
Industry D AR
Industry MC
Industry MR
Q1
P1
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OLIGOPOLYOLIGOPOLY
• Key features of oligopoly
– barriers to entry
– interdependence of firms
– incentives to compete versus incentives to collude
• Factors favouring collusion
• Collusive oligopoly: cartels
– equilibrium of the industry
– allocating and enforcing quotas
• Key features of oligopoly
– barriers to entry
– interdependence of firms
– incentives to compete versus incentives to collude
• Factors favouring collusion
• Collusive oligopoly: cartels
– equilibrium of the industry
– allocating and enforcing quotas
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0
5
10
15
20
25
30
35
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00
$ per barrel
Actual price
Cease-fire inIran-Iraq war
Yom KippurWar: Arab oil
embargo
First oil fromNorth Sea
Revolutionin Iran
Iraq invadesIran
OPEC’s firstquotas
Iraq invadesKuwait
New OPECquotas
World-widerecovery
Recessionin Far East
World-wideslowdown
Oil PricesOil Prices
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0
5
10
15
20
25
30
35
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00
$ per barrelActual price
Cost in 1973 prices
Yom KippurWar: Arab oil
embargo
First oil fromNorth Sea
Revolutionin Iran
Iraq invadesIran
OPEC’s firstquotas
Cease-fire inIran-Iraq war Recession
in Far East
Iraq invadesKuwait
New OPECquotas
World-widerecovery
World-wideslowdown
Oil PricesOil Prices
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• Tacit collusion
– price leadership
• dominant firm
• Tacit collusion
– price leadership
• dominant firm
OLIGOPOLYOLIGOPOLY
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Dmarket
£
QO
Sall other firms
P1
P2
a
b
Division of the market between leader and followersDivision of the market between leader and followers
Dleader
Dominant firm price leadershipDominant firm price leadership
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£
QO
Sall other firms
Dmarket
Dleader
PL
MRleader
MCleader
QL QFQT
f t
Determination of price and outputDetermination of price and output
l
Dominant firm price leadershipDominant firm price leadership
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£
Q O
MR leader
AR D leader
AR D market
Price leader aiming to maximise profits for a given market sharePrice leader aiming to maximise profits for a given market share
Assume constantmarket share
for leader
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£
Q O
AR D market
MC
MR leader
PL
QT
AR D leader
QL
l t
Price leader aiming to maximise profits for a given market sharePrice leader aiming to maximise profits for a given market share
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• Tacit collusion
– price leadership
• dominant firm
• barometric
• Tacit collusion
– price leadership
• dominant firm
• barometric
OLIGOPOLYOLIGOPOLY
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• Tacit collusion
– price leadership
• dominant firm
• barometric
– rules of thumb
• Tacit collusion
– price leadership
• dominant firm
• barometric
– rules of thumb
OLIGOPOLYOLIGOPOLY
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• Tacit collusion
– price leadership
• dominant firm
• barometric
– rules of thumb
• Collusion and the law
• Tacit collusion
– price leadership
• dominant firm
• barometric
– rules of thumb
• Collusion and the law
OLIGOPOLYOLIGOPOLY
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• Tacit collusion
– price leadership
• dominant firm
• barometric
– rules of thumb
• Collusion and the law
• The breakdown of collusion
• Tacit collusion
– price leadership
• dominant firm
• barometric
– rules of thumb
• Collusion and the law
• The breakdown of collusion
OLIGOPOLYOLIGOPOLY
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2
4
6
10
12
1000
MC
AR
MR
£
Q
The IndustryThe Industry
2000 3000
£10 is the cartel’sprofit-maximising price
8
The incentive for a firm to produce more than its quota, or undercut the cartel’s price
The incentive for a firm to produce more than its quota, or undercut the cartel’s price
0
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2
4
6
8
10
12
200 400 600
MC
AR
MR
£
Q
Firm AFirm A
800
Cartel PriceCartel Price(= (= MRMR if price remains fixed) if price remains fixed)
Firm is temptedto increase
output to 600
The incentive for a firm to produce more than its quota, or undercut the cartel’s price
The incentive for a firm to produce more than its quota, or undercut the cartel’s price
0
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• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
OLIGOPOLYOLIGOPOLY
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Profits for firms A and B at different pricesProfits for firms A and B at different prices
£2.00 £1.80
£2.00
£1.80
X’s price
Y’s price
A B
C D
£10m each
£8m each£12m for Y£5m for X
£5m for Y£12m for X
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• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games
OLIGOPOLYOLIGOPOLY
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Profits for firms A and B at different pricesProfits for firms A and B at different prices
£2.00 £1.80
£2.00
£1.80
X’s price
Y’s price
A B
C D
£10m each
£8m each£12m for Y£5m for X
£5m for Y£12m for X
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• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
OLIGOPOLYOLIGOPOLY
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The prisoners' dilemmaThe prisoners' dilemma
Not confess Confess
Notconfess
Confess
Amanda's alternatives
Nigel'salternatives
A B
C D
Each gets1 year
Each gets3 years
Nigel gets3 months
Amanda gets10 years
Nigel gets10 years
Amanda gets3 months
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• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
– more complex non-dominant strategy games
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
– more complex non-dominant strategy games
OLIGOPOLYOLIGOPOLY
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Profit possibilities for firm XProfit possibilities for firm X
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Profit possibilities for firm XProfit possibilities for firm X
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Profit possibilities for firm XProfit possibilities for firm X
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Profit possibilities for firm XProfit possibilities for firm X
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• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
– more complex non-dominant strategy games
– Importance of threats and promises
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
– more complex non-dominant strategy games
– Importance of threats and promises
OLIGOPOLYOLIGOPOLY
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• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
– more complex non-dominant strategy games
– Importance of threats and promises
– Importance of timing
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
– more complex non-dominant strategy games
– Importance of threats and promises
– Importance of timing
OLIGOPOLYOLIGOPOLY
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• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
– more complex non-dominant strategy games
– Importance of threats and promises
– Importance of timing• decision trees
• Non-collusive oligopoly: game theory– alternative strategies: maximax and
maximin
– simple dominant strategy games• the prisoners’ dilemma
– more complex non-dominant strategy games
– Importance of threats and promises
– Importance of timing• decision trees
OLIGOPOLYOLIGOPOLY
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Boeingdecides
500
seat
er
500 seater
500 seater
400 seater
400 seater
400 seater
A decision treeA decision tree
Boeing –£10mAirbus –£10m
(1)
Boeing +£30mAirbus +£50m
(2)
Boeing +£50mAirbus +£30m
(3)
Boeing –£10mAirbus –£10m (4)
Airbusdecides
B2
Airbusdecides
B1
A
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• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– the shape of the demand and MR curves
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– the shape of the demand and MR curves
OLIGOPOLYOLIGOPOLY
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Kinked demand for a firm under oligopolyKinked demand for a firm under oligopoly
£
QO
P1
Q1
Current priceand quantity
give one pointon demand curve
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£
QO
P1
Q1
D
D
Kinked demand for a firm under oligopolyKinked demand for a firm under oligopoly
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£
QO
P1
Q1
MR
a
bD AR
Kinked demand for a firm under oligopolyKinked demand for a firm under oligopoly
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• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– the shape of the demand and MR curves
– stable prices
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– the shape of the demand and MR curves
– stable prices
OLIGOPOLYOLIGOPOLY
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£
QO
P1
Q1
MC2
MC1
MR
a
bD AR
Stable price under conditions of a kinked demand curveStable price under conditions of a kinked demand curve
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• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– the shape of the demand and MR curves
– stable prices
– limitations of the model
• Non-collusive oligopoly: the kinked demand curve theory
– assumptions of the model
– the shape of the demand and MR curves
– stable prices
– limitations of the model
OLIGOPOLYOLIGOPOLY
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• Oligopoly and the public interest
– advantages
– disadvantages
– difficulties in drawing general conclusions
• Advertising and the public interest
• Oligopoly and contestable markets
• Oligopoly and the public interest
– advantages
– disadvantages
– difficulties in drawing general conclusions
• Advertising and the public interest
• Oligopoly and contestable markets
OLIGOPOLYOLIGOPOLY
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Imperfect CompetitionImperfect Competition
Price DiscriminationPrice Discrimination
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PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Meaning of price discrimination
• Types of price discrimination
– first degree
• Meaning of price discrimination
• Types of price discrimination
– first degree
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First-degree price discriminationFirst-degree price discrimination
O
P1
D
200
P
Q
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O
P1
D
200
P
Q
First-degree price discriminationFirst-degree price discrimination
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PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Meaning of price discrimination
• Types of price discrimination
– first degree
– second degree
• Meaning of price discrimination
• Types of price discrimination
– first degree
– second degree
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PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Meaning of price discrimination
• Types of price discrimination
– first degree
– second degree
– third degree
• Meaning of price discrimination
• Types of price discrimination
– first degree
– second degree
– third degree
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Third-degree price discriminationThird-degree price discrimination
P
QO
P1
D
200
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O
P1
D
P2
150 200
P
Q
Third-degree price discriminationThird-degree price discrimination
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PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Meaning of price discrimination
• Types of price discrimination
– first degree
– second degree
– third degree
• Conditions necessary for price discrimination to operate
• Meaning of price discrimination
• Types of price discrimination
– first degree
– second degree
– third degree
• Conditions necessary for price discrimination to operate
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• Profit-maximising prices and output under price discrimination
– first degree
• Profit-maximising prices and output under price discrimination
– first degree
PRICE DISCRIMINATIONPRICE DISCRIMINATION
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D = MR
MC£
Q O Q1
Profit maximising under first-degree price discriminationProfit maximising under first-degree price discrimination
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• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
PRICE DISCRIMINATIONPRICE DISCRIMINATION
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O O OMRX
(a) Market X
DX
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
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O O O
DY
MRX
MRY
(a) Market X (b) Market Y
DX
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
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O O OMRX
MRY MRT
(a) Market X (b) Market Y (c) Total
(markets X + Y)
DX
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
DY
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Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
O O OMRX
MRY MRT
MC
(a) Market X (b) Market Y (c) Total
(markets X + Y)
DX
DY
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O O OMRX
MRY MRT
MC
(a) Market X (b) Market Y (c) Total
(markets X + Y)
DX
3000
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
DY
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O O O
DX
MRX
MRY MRT
MC
5
(a) Market X (b) Market Y (c) Total
(markets X + Y)
3000
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
DY
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O O OMRX
MRY MRT
MC
5
1000
(a) Market X (b) Market Y (c) Total
(markets X + Y)
DX
3000
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
DY
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O O OMRX
MRY MRT
MC
5
1000 2000
(a) Market X (b) Market Y (c) Total
(markets X + Y)
DX
3000
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
DY
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O O OMRX
MRY MRT
MC
5
9
1000 2000
(a) Market X (b) Market Y (c) Total
(markets X + Y)
DX
3000
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
DY
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O O OMRX
MRY MRT
MC
DY
5
7
1000 2000 3000
(a) Market X (b) Market Y (c) Total
(markets X + Y)
9
DX
Profit-maximising output underthird degree price discriminationProfit-maximising output under
third degree price discrimination
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• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
PRICE DISCRIMINATIONPRICE DISCRIMINATION
![Page 76: 05. imperfect competion](https://reader033.vdocuments.net/reader033/viewer/2022061208/548ba767b47959bb2d8b457c/html5/thumbnails/76.jpg)
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
• Price discrimination and the public interest
– advantages
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
• Price discrimination and the public interest
– advantages
PRICE DISCRIMINATIONPRICE DISCRIMINATION
![Page 77: 05. imperfect competion](https://reader033.vdocuments.net/reader033/viewer/2022061208/548ba767b47959bb2d8b457c/html5/thumbnails/77.jpg)
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
• Price discrimination and the public interest
– advantages
– disadvantages
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
• Price discrimination and the public interest
– advantages
– disadvantages
PRICE DISCRIMINATIONPRICE DISCRIMINATION