Micro 2: Problem Set 4

1. Show that the monopolists prot falls as he moves from rst- to second- to third-degree price discrimination. 2. [Bundling] A rm which is a monopoly in production of one good (say pencils) is also producing a complementary good (say erasers), for which there is a competitive market. Consumers have quasi-linear utility functions. (a) Formalize the demand side for pencils and erasers for the case when pencils and erasers are perfect one-to-one complements for each customer. Suppose that all consumers have identical preferences in this scenario. Derive the aggregate demand for pencils and erasers. (b) Formalize the demand side for pencils and erasers for the case when each customers utilities from given quantities of pencils and erasers are additive, but dierent customers dier in utilities they derive from the same quantities of pencils and erasers, varying independently in each component. Derive the aggregate demand for pencils and erasers. Do you results dier from (a)? (c) Assuming increasing marginal costs in productions of both pencils and erasers and that the monopolist cannot price discriminate, describe the market equilibrium for this economy for scenarios (a) and (b). How do the prices for pencils and erasers dier for each scenario? Do you see any substantial (qualitative) dierence between the two scenarios? (d) Suppose now that the monopolist can oer a bundle a box, containing one pencil and one eraser. What would the monopolist do under perfect complements scenario? How does aggregate demand, supply, consumptions look like in this case? What happens with the deadweight loss compared to pure goods solution? (e) Do the same analysis as in (d) but for the separable utilities scenario.

Due 11:45 on Wednesday, Nov 28, 2012

(f) Compare your results in (d) and (e) and comment. Which scenario is more adequate to model bundling? 3. [Double marginalization] Consider a local market, for instance for I-gadgets in Yakutsk. These I-gadgets are produced by A-rm, which is a monopolist in production of these gadgets. A local Yakutsk rm, Lena, is buying I-gadgets on the international market from A-rm, and is selling them in Yakutsk. Lena is the only rm bringing I-gadgets to Yakutsk. Assume that Lena takes the price per gadget from A-rm as given, but is able to set any price for the local market. (a) Formalize the model. Find the prices that each rm sets and the quantity the is produced and traded. (b) Compare your ndings to the case of competitive markets and to the case where a single monopolist (A-rm) serves Yakutsk market. (c) Suppose that A-rm can oer dierent options to Lena (instead of charging per unit price). What will it oer?