Task 12

1. Why would firms apply price discrimination?

Price discrimination is a pricing strategy that charges customers different prices for identical goods or
services according to certain criteria. In pure price discrimination, the seller/provider will charge each
customer the maximum price they are willing to pay. The purpose of price discrimination is to capture
the market's consumer surplus. Price discrimination allows the seller to generate the most revenue
possible for a product or service.

2. When can firms apply price discrimination?

Within commerce there are specific criteria that must be met in order for price discrimination to occur:

 The firm must have market power.

 The firm must be able to recognize differences in demand.
 The firm must have the ability to prevent arbitration, or resale of the product.

3. The different forms of price discrimination; perfect, group and nonlinear price discrimination
(not the other forms of nonuniform pricing).
Perfect price discrimination, or First-degree discrimination, occurs when a business charges the
maximum possible price for each unit consumed. Because prices vary among units, the firm captures
all available consumer surplus for itself or the economic surplus. Many industries involving client
services practice first-degree price discrimination, where a company charges a different price for
every good or service sold.
Also known as third-degree price discrimination, group price discrimination involves charging
different prices depending on a particular market segment or consumer group. It is commonly seen in
the entertainment industry. For example, when an individual wants to see a movie, prices for the same
screening are different depending on if you are a minor, adult, or senior.
Nonlinear pricing, or second-degree price discrimination, involves setting prices subject to the amount
bought, in an attempt to capture part of the consumer surplus. Revenues collected by the firm in this
matter will be a nonlinear function. A bulk sale strategy, such as quantity discounts, will be applied
and consumers will choose the block that better suits them.

4. Provide additional examples of price discrimination.

  Coupons: coupons are used to distinguish consumers by their reserve price. Companies
increase the price of a good and individuals who are not price sensitive will pay the higher
price. Coupons allow price sensitive consumers to receive a discount. At the same time the
seller is still making increased revenue.
 Age discounts: age discounts are a form of price discrimination where the price of a good
or admission to an event is based on age. Age discounts are usually broken down by child,
student, adult, and senior. In some cases, children under a certain age are given free
admission or eat for free. Examples of places where age discounts are given include
restaurants, movies, and other forms of entertainment.
 Occupational discounts: price discrimination is present when individuals receive certain
discounts based on their occupation. An example is when active military members receive
discounts.
 Retail incentives: this includes rebates, discount coupons, bulk and quantity pricing,
seasonal discounts, and frequent buyer discounts.
 Gender based prices: in certain markets prices are set based on gender. For example, a
Ladies Night at a bar is a form of price discrimination.
 Travel industry: airlines and other travel companies use differentiated pricing often. Travel
products and services are marketed to specific social segments. Airlines usually assign specific
capacity to various booking classes. Also, prices fluctuate based on time of travel (time of day,
day of the week, time of year). Prices fluctuate between companies as well as within each
company.
 Pharmaceutical industry: price discrimination is common in the pharmaceutical industry. Drug-
makers charge more for drugs in wealthier countries. For example, drug prices in the United
States are some of the highest in the world. Europeans, on average, pay only 56% of what
Americans pay for the same prescription drugs.

5. Develop the iPhone example from the text of the task. That means two things:
- Determine the region-specific demand elasticities at the original monopoly optimum, and draw
your conclusion.
- Determine the optimal price discrimination scheme.
????

6. The social welfare consequences of price discrimination.

Price discrimination allows monopolies to grow and gain more of the market share. This could be a
problem for consumers later on as monopolies may increase prices. The growth of monopolies may act as
a barrier to market entry for small firms. This may limit the level of consumer choice and reduce social
welfare.
One possible social welfare benefit of price discrimination is the environmental spillovers. The use of
price discrimination can allow firms to use up spare capacity which could reduce the level of waste.
Furthermore, price discrimination can be used to promote renewable energy generating larger profits. The
use of price discrimination can allow previously unprofitable start-up companies to stay in business. This
has economic benefits and social benefits as pollution decreases and unclean, non-renewable energy
declines.
Despite this, the use of price discrimination may lead to shadow markets forming. For example price
discrimination in the gaming industry leads to the growth of second hand stores growing. This secondary
market may cut into the profits of firms. There has been growth in businesses such as reselling tickets to
events such as festivals, gigs and sports events. The profitability of firms is reduced when the goods are
bought for cheap prices and sold elsewhere at a higher price, creating profit for the resale business.

Task 13
1. Give examples of real world markets that resemble the various theoretical types: monopoly,
oligopoly, perfect competition, monopolistic competition.
 Monopoly: Public services like the railways are provided by the government. Hence, they are a
monopolist in the sense that new partners or privately held Companies are not allowed to run
railways. However, the price of the tickets is reasonable so that public transport can be used
by the majority of people.
 Oligopoly: Big Tech  Operating systems for smartphones and computers provide excellent
examples of oligopolies in big tech. Apple iOS and Google Android dominate smartphone
operating systems, while computer operating systems are overshadowed by Apple and
Microsoft Windows. Big tech also is concentrated on the Internet, with Google, Meta
(formerly Facebook), and Amazon dominating.
 Perfect competition:
o Foreign exchange markets. Here currency is all homogeneous. Also, traders will have
access to many different buyers and sellers. There will be good information about
relative prices. When buying currency it is easy to compare prices
o Agricultural markets. In some cases, there are several farmers selling identical
products to the market, and many buyers. At the market, it is easy to compare prices.
Therefore, agricultural markets often get close to perfect competition.

 Monopolistic competition:
o Restaurants – restaurants compete on quality of food as much as price. Product
differentiation is a key element of the business. There are relatively low barriers
to entry in setting up a new restaurant.
o Hairdressers. A service which will give firms a reputation for the quality of their
hair-cutting.
o Clothing. Designer label clothes are about the brand and product differentiation
 o TV programmes – globalisation has increased the diversity of tv programmes
from networks around the world. Consumers can choose between domestic
channels but also imports from other countries and new services, such as Netflix.

2. What factors influence the likelihood that a cartel is successful?,

First, firms must achieve a common understanding not to compete and how they are not to compete
(coordination condition). Second, a cartel must adopt a collusive arrangement that incentivizes its
members to comply (internal stability condition). Third, a cartel must tame the possible expansion of
supply by firms not members of the cartel (external stability condition). Fourth, a cartel must avoid
detection and penalization by the competition authority and customers (enforcement condition).

3. What is Cournot competition?

Cournot competition is an economic model describing an industry structure in which rival companies
offering an identical product compete on the amount of output they produce, independently and at the
same time. The Cournot model is applicable when companies produce identical or standardized goods.
It assumes they cannot collude or form a cartel, have the same view of market demand, and are
familiar with competitor operating costs.

4. What is a residual demand curve? Apply to the smartphone example!

The residual demand curve is the market demand curve minus the quantity supplied by other firms, we
can write this D^r (P) = D (P) - S^o (P). Each firm’s residual demand curve depends on the output
decision of the other – or if they do not know the output decision of the other, the amount they expect
the other to produce. Each firm will need to have a good estimate of what its residual demand curve
will be in order to choose the correct quantity of output to
produce, as the firm will want to produce the quantity where MR
= MC.
 5. How to determine a best response curve? Apply to the smartphone example!
To find best response function of firm 1, look at its payoff as a function of its output, given output of
firm 2.
Quantity that maximizes apple’s profit given the quantity of Samsung.

6. How to determine the Cournot equilibrium? What are its characteristics? Apply to the
smartphone example
Once you know the optimal demand and optimal revenues for the market as a whole, you can now
calculate the point of equilibrium for either company's production, disregarding any collusion between the
two using this formula: π = P(Q) q − C(q).
In this formula:
π is the individual company's profit.
Q is the level of total market output.
q is the individual company's output.
P is the price of the product.
C(q) is a function of the company's total costs associated with each level of its output.
Using this formula, each company or either company can adjust its own production quantity (q) so that its
individual profit (π) is at its maximum.
The Cournot model of oligopoly assumes that rival firms produce a homogenous product, and each
attempts to maximize profits by choosing how much to produce. All firms choose output (quantity)
simultaneously. The basic Cournot assumption is that each firm chooses its quantity, taking as given the
quantity of its rivals. The resulting equilibrium is a Nash equilibrium in quantities, called a Cournot
(Nash) equilibrium. It also yields a stable Nash equilibrium, an outcome from which neither player
would like to deviate unilaterally.

7. What does the model of monopolistic competition look like?

Task 14
1. What is strategic behavior / strategic interaction?
Strategic behaviour is the general term for actions taken by firms which are intended to influence the
market environment in which they compete. Strategic behaviour includes actions to influence rivals to
act cooperatively so as to raise joint profits, as well as noncooperative actions to raise the firm's
profits at the expense of rivals.
Various types of collusion are examples of cooperative strategic behaviour. Examples of
noncooperative strategic behaviour include pre-emption of facilities, price and non-price predation
and creation of artificial barriers to entry. Strategic behaviour is more likely to occur in industries with
small numbers of buyers and sellers.
The term "strategic interaction" describes gamelike events in which an individual's situation is fully
dependent on the move of one's opponent and in which both players know this and have the wit to use
this awareness for advantage.

2. How to find the solution of a game? And what is a Nash equilibrium?

Nash equilibrium is a concept within game theory where the optimal outcome of a game is where
there is no incentive to deviate from the initial strategy. More specifically, the Nash equilibrium is a
concept of game theory where the optimal outcome of a game is one where no player has an incentive
to deviate from their chosen strategy after considering an opponent's choice.
Overall, an individual can receive no incremental benefit from changing actions, assuming other
players remain constant in their strategies. A game may have multiple Nash equilibria or none at all.

3. What is the equilibrium in the Prisoners’ Dilemma game, and why is it surprising?
It’s not optimal.

4. What does the phrase “static game with complete but imperfect information” mean?

5. How does the Cournot model from Task 13 fit into all of this?