Question

Draw a graph and explain why a two-part pricing strategy that firms with market power use gives them a higher profit compared to profit under a single unit price rule?

Answer 1

120 A 100 A single price monopoly uses marginal cost and marginal revenue to determine the quantity produced and the price charged. This is done in this case where quantity is 40000 and price is 60. MC = AC is 20 which implies that profit is (60 - 20)*40000 = 1,600,000. 80 B Dollars 60 С 40 E F 20 D A two-part tariff has one part as per unit charge which is equal to MC. This is $20 per unit in this case. The second part is the admission fee which is equal to consumer surplus at this price. This is equal to 0.5*(100 - 20)*80000 = 3,200,000. 120 This shows that two-part tariff has higher profit than a single price monopoly. 0 0 20 100 40 60 80 Quantity (in thousands) Demand Marginal revenue Marginal cost