First-degree price discrimination, or perfect discrimination, is the highest level of price discrimination, in which each unit of production is sold at the maximum price that the consumer is willing to pay for that specific unit. The firm will gain the entire market surplus it could possibly achieve, as it will sell all the units for the maximum price at which they could be sold. This degree of price discrimination will always have as a result a Pareto efficient level of output as marginal willingness to pay will be equal to marginal cost. For this reason and even though monopolies are associated with this strategy, the production level of output will be the same as in a competitive market, and hence, the inefficiency associated to monopolies will be eliminated. As seen in the adjacent figure, the producer surplus equals total surplus (A+B). There is not deadweight loss, even though there is not consumer surplus (A, which was extracted by the monopoly), and at the end both quantity and price are equal to those that would result from perfect competition.

First-degree price discrimination is, however, quite unrealistic. On the one hand, income elasticity of demand should be equal to zero in order for perfect discrimination to work. On the other hand, there should be imperfect information in the market, since consumers knowing that the price would drop if they showed lower willingness to buy would make them show it, thus making impossible for the monopoly to practice first-degree price discrimination. Knowing the distribution of consumers’ preferences is almost impossible to determine and it is certainly expensive to research. Therefore, in real life, the closest thing there is to perfect discrimination is bargaining reductions in prices (known as second-degree price discrimination) or offering a two-part tariff. First degree price discrimination, as we’ve seen, is too theoretical. Let’s learn about non linear pricing, also known as second degree price discrimination.NBER Working Paper No. 55 Issued in September 1974

When an industry is monopolized, price rises above and output falls below the competitive level. Those who continue to buy the product at the higher price suffer a loss, but this loss is exactly offset by the additional revenue that the monopolist obtains by charging the higher price. Other consumers, who are deflected by the higher price to substitute goods, suffer a loss, that is not offset by gains to the monopolist. Triple Swivel Towel BarsThis is the "deadweight loss" from monopoly, and in conventional analysis the only social cost of monopoly. Boxer Puppies For Sale In PhiladelphiaThe loss suffered by those who continue to buy the product at the higher cost is regarded merely as a transfer from consumers to owners of the monopoly seller and has not previously been factored into the social costs of monopoly. 185/60r14 Tire Prices

However, the existence of an opportunity to obtain monopoly profits will attract resources into efforts to obtain monopolies, and the opportunity costs of those resources are social costs of monopoly, too. Although the tendency of monopoly rents to be transformed into costs is no longer a novel insight, its implications both for the measurement of the aggregate social costs of monopoly and for a variety of other important issues relating to monopoly and public regulation (including tax policy) continue to be ignored. The present paper is an effort to rectify this neglect. Part I introduces the material. Part II presents a simple model of the social costs of monopoly, conceived as the sum of the deadweight loss and the additional loss resulting from the competition to become a monopolist. Part III uses the model to estimate the social costs of monopoly in the United States, and the social benefits of antitrust enforcement. Part IV explores the implications of the analysis for a variety of issues relating to monopoly and public regulation, such as public policy toward price discrimination and the choice between income and excise taxation.

Machine-readable bibliographic record - Document Object Identifier (DOI): 10.3386/w0055 Published: JPE, Vol. 83, no. 4 (1975): 807-828.« Forecasting Deficits Ontario Style |Three different ways expectations can matter. Subscribe to this blog's feed Econometrics Beat: Dave Giles' Blog Martin Coiteux sur l'économie et la politique Northern Economist (Livio Di Matteo) Rescuing the frog (Andrew Leach) Brad DeLong's Semi-Daily Journal Crawl Across the Ocean Dan Gardner (Ottawa Citizen) Blog powered by TypepadThe requested URL /~asefa/Teaching/201/Mankiew%20Chapter%2015.ppt was not found on this server.The paper investigates prices and deadweight loss in multiproduct monopoly with linear interrelated demand and constant marginal costs. We show that, with commonly used models for linear demand such as the Bowley demand and vertically or horizontally differentiated demand, the price for each good is independent of demand cross-effects and of the characteristics and number of other goods.

This contrasts with the oft-expressed view that prices critically depend on demand cross-effects. We also show that for these linear models, the deadweight loss due to monopoly amounts to half the total monopoly profit. Finally, we show how a production subsidy might restore social efficiency. IB HL History Mr. Blackmon Paper 03 Essay Cover Sheet (Revised Economics HL paper 1 TZ1 Dimensions of linguistic variation - Sample assessment Sample GCE Lesson Plan Mark Scheme - Tasker Milward A2 GCE Classics F373 Classical Greek Verse Sample Higher Level IB History Internal Assessment – The Historical The German Reformation and the rule of Charles V 1500–1559Patents are a dreadfully inefficient way of encouraging new product invention. First, granting a monopoly will create deadweight loss, and patents functionally create 14 to 20 year monopolies. Second, monopoly price is not clearly linked to the consumer value a new good creates, so even ignoring deadweight loss, social and private incentives are not aligned.

Third, patents distort inventive activity away from complements to already-patented products. Having government direct research by, for example, offering prizes to inventors of various new products is suboptimal for informational reasons. In a well-known 1998 QJE, Michael Kremer proposes patent buyouts to alleviate some of these concerns. A patent holder could offer to auction his patent (or simply to retain it as in the status quo). Other firms bid in a standard second-prize auction. After the auction, the government randomizes. With probability p, the government pays a markup over the winning bid, and with 1-p sells to the private firm. This randomization ensures both that rival firms have an incentive to reveal their private information about the value of the patent, but also that, because of the markup, the returns to research are higher than under the status quo, and higher in a way that positively incentivizes research. Kremer notes that when a patent has common value, but the seller has private information about its value, then the government markup can allow trade to happen.

With no government markup, clearly no one with private information can sell: every potential buyer will know that if the seller is willing to sell, then he must have private information that the patent is worth less than the sales price. But if with some probability, the government pays a markup, then the seller will go to auction anyway hoping to get the markup. [A side note: there appears to be a mistake in this section, in the example in IV.A. Markup or not, a bidder in a common value second-price auction surely needs to shade his bid in equilibrium, right? Assume that the markup is such that the patent-holder always auctions. Let there be some large (approaching infinite) number of bidders, with signals of x+[-1,1] uniform about the value of the patent, where x is the true common value. Conditional on winning, my expected signal is x+1, and my expected payment is also x+1 (as the number of bidders goes to infinity), which gives me profit of -1. The paper appears to me to conflate winner’s curse with some sort of No Trade theorem…though I’m more than happy to be corrected on this point!)

There is an unanswered question lingering in this paper: would we be better off just having no patents at all? Government payouts are distortionary since raising tax revenue is distortionary, so a buyout system needs to provide a much better welfare outcome than a no-patent system in order to be worth it. There are business surveys that suggest huge percentages of patents are taken out for strategic reasons other than gaining market power in the specific product: for instance, in the technology sector, it is frequent for firms to trade licenses on their patents to each other after downstream products are created, and to exclude new firms who have no such patents. A voluntary patent buyout system does not solve these problems. I’m also less sanguine than Kremer about regulatory capture. He suggests that history mainly consists of government expropriation of patents rather than government handouts to favored firms. I think that the recent history of copyright law is utterly the opposite: both the US and other countries have regularly legislated handouts to the powerful.