A monopolist faces a market split evenly between high valuation consumers with individual inverse demand PH...

A monopolist faces a market split evenly between high valuation consumers with individual inverse demand

PH = 20 − yH

and low valuation consumers with individual inverse demand

PL = 16 − 2yL

For convenience, suppose the firm has a marginal cost equal to zero. Moreover, arbitrage is not possible.

(a) (15 points) Assume the firm cannot observe group status (i.e., cannot identify if a customer has a high or low valuation). Determine the firm's best second-degree pricing scheme. Show this outcome on a graph and explain why your answer is the best strategy for the firm.

(b) (5 points) Is the market outcome in part (a) Pareto efficient? If not, calculate the deadweight loss.

(c) (15 points) How will your answer in part (a) change if the low valuation customers have an inverse demand given by PL = 4 − 2yL? Fully explain your answer.

Solutions

Expert Solution

Refer to above given hand-outs to see answers to this question.

Rahul Sunny answered 1 year ago

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