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Chapter 26 61
Chapter 26
Monopoly Behavior
This chapter is concerned with price discrimination, product differentiation,
monopolistic competition, and the like.
Price discrimination is a great topic for discussion. It is good to bring up
examples of price discrimination from the students’ lives. A local movie theater
here offers discounts on Tuesday nights. Local bars have happy hours. The
electricity company charges nonlinear prices for electricity service. There are
many more examples of this sort of thing.
In the fourth edition I have described first-, second- and third-degree price
discrimination in a more systematic way. The second-degree analysis is quite
interesting, I think, since it uses only consumers’ surplus analysis.
The sections on bundling and on two-part tariffs are also quite interesting.
There are hundreds of examples of bundling you might discuss. Two-part tariffs
are also quite common and have the bonus of serving as a good example of
first-degree price discrimination. You might want to talk about the efficiency
implications of two-part tariffs.
Finally, the Hotelling boardwalk example is very useful. In the text I empha-
size the point that the example can lead to extreme product differentiation, as
well as no differentiation, even in the case of two players.
Monopoly Behavior
A. Price discrimination
1. first degree — perfect price discrimination
2. second degree — nonlinear pricing
3. third degree — most common
62 Chapter Highlights
a)
c) or
B. Two-part tariffs
1. what happens if everyone is the same?
C. Bundling
1. type A: wtp $120 for word processor, $100 for spreadsheet
2. type B: wtp $100 for word processor, $120 for spreadsheet
D. Monopolistic competition
1. rare to see pure monopoly
2. product differentiation – so some market power
3. free entry
4. result — excess capacity theorem
5. location model of product differentiation
a) ice cream vendors on the boardwalk
