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Chapter10(continued)PricingwithMarketPowerMonopolisticCompetitionTopicstobeDiscussedCapturingConsumerSurplusPriceDiscriminationIntertemporalPriceDiscriminationandPeak-LoadPricingTheTwo-PartTariffBundlingMonopolisticCompetitionIntroductionPricingwithoutmarketpower(perfectcompetition)isdeterminedbymarketsupplyanddemandTheindividualproducermustbeabletoforecastthemarketandthenconcentrateonmanagingproduction(cost)tomaximizeprofitsIntroductionPricingwithmarketpower(imperfectcompetition)requirestheindividualproducertoknowmuchmoreaboutthecharacteristicsofdemandaswellasmanageproductionItalsorequiresthediscriminatingproducertosegmentthemarketssuccessfullysuchthatnoarbitrageacrossmarketsoccursCapturingConsumerSurplusAllpricingstrategieswewillexaminearemeansofcapturingconsumersurplusandtransferringittotheproducerProfitmaximizingpointofP*andQ*◦ButsomeconsumerswillpaymorethanP*foragoodRaisingpricewilllosesomeconsumers,leadingtosmallerprofitsLoweringpricewillgainsomeconsumers,butlowerprofitsCapturingConsumerSurplusQuantity$/QDMRPmaxMCPCThefirmwouldliketochargehigherpricetothoseconsumerswillingtopayit-AP*Q*AP1FirmwouldalsoliketoselltothoseinareaBbutwithoutloweringpricetoallconsumersBP2BothwayswillallowthefirmtocapturemoreconsumersurplusCapturingConsumerSurplusPricediscriminationisthepracticeofchargingdifferentpricestodifferentconsumersforsimilargoods◦MustbeabletoidentifythedifferentconsumersandgetthemtopaydifferentpricesOthertechniquesthatexpandtherangeofafirm’smarkettogetatmoreconsumersurplus◦Two-PartTariffsandbundlingPriceDiscriminationFirstDegreePriceDiscrimination◦Chargeaseparatepricetoeachcustomer:themaximumorreservationpricetheyarewillingtopayHowcanafirmprofit?◦ThefirmproducesQ*MR=MC◦Wecanseethefirm’svariableprofit–thefirm’sprofitignoringfixedcostsAreabetweenMRandMC◦ConsumersurplusareabetweendemandandpricePriceDiscriminationIfthefirmcanpricediscriminateperfectly,eachconsumerischargedexactlywhattheyarewillingtopay◦MRcurv...