Transcript rent seeking - Oregon State University

RENT SEEKING
• Using resources to get monopoly power.
• Firms are willing to spend up to the amount of monopoly
profit which could be made, to make a monopoly.
• Loss to society would be monopoly profit (M) plus
deadweight loss (D).
PATENTS AND MONOPOLY
POWER
• Incentives for innovation versus society’s cost of
monopoly.
• Allowing innovator to recoup costs of research
and development.
• What is an acceptable cost to society to ensure
product will be developed ?
PRICE DISCRIMINATION
• Firms divide consumers into two or more groups
and pick a different price for each group.
• One approach is to offer a discount (resulting in a
lower price) to some types of consumers.
PRICE DISCRIMINATION
• Price discrimination involving discounts:
• Discounts on airline tickets for
travelers willing to spend Saturday
home,
• Discount coupons for groceries and
• Manufacturers’ rebates for appliances,
• Senior citizen discounts,
• Student discounts
night away from
restaurant food,
PRICE DISCRIMINATION
A firm has an opportunity for price discounts if three conditions are
met.
1. Market power -- A firm must have some
control over its
price.
2. Different consumer groups -Consumers must
differ in willingness to
pay for product or in responsiveness to
changes in price.
3. Resale is not possible -- It must be
impractical for one
consumer to sell the
product to another consumer.
SINGLE PRICE POLICY VERSUS
PRICE DISCRIMINATION
Price
Price
s
5
3
Marginal
Revenue
Demand
6
5
Marginal
Revenue
Demand
f
n
d
c
e
1
125
280
Number of
Senior Customers
1
Marg Cost =
Average Cost
260 300
Number of NonSenior Customers
PRICE DISCRIMINATION ADVANTAGE
• TOTAL PROFIT INCREASES:
@$5 single price
100 seniors * $5 = $500
seniors * $5 = $1,500
300 non-
Total Profit = $1,600 - (400 * $1) = $1,200
@ $3 senior price and $6 non-senior price,
280 seniors * $3 = $840
seniors * $6 = $1,560
Total Profit = $2,400 - (540 * $1) = $1,860
260 non-
PRICE DISCRIMINATION
ADVANTAGE
• Total number of customers increases:
Seniors increase from 100 to 280,
Non-seniors decrease from 300
to 260,
Total number of customers increases from 400 to 540.
PRICE DISCRIMINATION AND
ELASTICITY OF DEMAND
• Seniors have more elastic demand for restaurant meals:
Lower incomes,
More flexible schedules;
• Assume demand for restaurant meals by non-seniors is
inelastic.
PRICE DISCRIMINATION AND
ELASTICITY OF DEMAND
Price increase for non-seniors increases restaurant profit:
• Inelastic demand : increase in price
will increase
total revenue,
• Fewer non-senior customers
lowers cost,
• Increased total revenue with lower
cost provides an
increased profit.
PRICE DISCRIMINATION AND
ELASTICITY
OF
DEMAND
Price decrease for seniors increases restaurant profits:
• Elastic demand: Decrease in price
will increase
total revenue,
• More senior customers, higher
cost,
• If demand is very elastic, increase
in revenue will
exceed increase in
costs: profits will increase.