Appunti Industrial Organization + schemi risoluzione esercizi (a mano)

TITLE VII- COMMON RULES ON COMPETITION, TAXATION AND APPROXIMATION OF LAWS

Article 101

1. The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by

associations of undertakings and concerted practices which may affect trade between Member States and which have as their

object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which:

(a) directly or indirectly fix purchase or selling prices or any other trading conditions;

(b) limit or control production, markets, technical development, or investment;

(c) share markets or sources of supply;

(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive

disadvantage;

(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their

nature or according to commercial usage, have no connection with the subject of such contracts.

2. Any agreements or decisions prohibited pursuant to this Article shall be automatically void.

3. The provisions of paragraph 1 may, however, be declared inapplicable in the case of:

— any agreement or category of agreements between undertakings […] which contributes to improving the production or

distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting

benefit […].

Article 103 (Block exemption – “esenzioni per categoria” to Art. 101)

1. The appropriate regulations or directives to give effect to the principles set out in Articles 101 and 102 shall be laid down by

the Council, on a proposal from the Commission and after consulting the European Parliament.

2. The regulations or directives referred to in paragraph 1 shall be designed in particular: (a) to ensure compliance with the

prohibitions laid down in Article 101(1) and in Article 102 by making provision for fines and periodic penalty payments;

26.10.2012 Official EN Journal of the European Union C 326/89 (b) to lay down detailed rules for the application of Article 101(3),

taking into account the need to ensure effective supervision on the one hand, and to simplify administration to the greatest

possible extent on the other; (c) to define, if need be, in the various branches of the economy, the scope of the provisions of

Articles 101 and 102; (d) to define the respective functions of the Commission and of the Court of Justice of the European Union in

applying the provisions laid down in this paragraph; (e) to determine the relationship between national laws and the provisions

contained in this Section or adopted pursuant to this Article.

The ”hold-up” problem: Problem that arise when the transaction between two firms entails a

specific investment.

Asset specificity: the equipment that firm M can indoubt set (non si

capisce che dice) is specific for producing the item which is needed for

that downstream firm.

One possibility to avoid this problem is that the two firms merges

(and in general vertical integrations): in this case we’ve only one firm,

so there is unlikely to arise an opportunistic behaviour.

Lezione 21: Price Discrimination

It is a frequent practice that individuals pay different prices for what are basically the same products. There are several

categories of price discriminations. Let’s see intuitively whether it would be a benefit for the firm differentiating between prices

or according to quantities between individual:

° → °.

Suppose a firm is charging a price What is a potential benefit for the firm for

introducing a differentiation in the price? →

The demand curve shows us that it can increase its sales if it reduces its prices (°°

°° = ), and because

°° > , it gains extra revenues and face extra cost (= marginal cost times the increase

in quantity). ° °, °°

The situation is that it could be nice for the firm to sell at and further output at

°°.

Also consumers benefit from voluntary buying extra output at a lower price: so price

discrimination in principles increase the total surplus.

Area below the demand curve: what consumers are willing to pay (=consumers gross

surplus)

Conditions for price discrimination:

- Price discrimination should be legal (in general it is legal if not dealing with discrimination of race, gender … )

- Notice that there is a basic difficulty that price discrimination have to overcome: arbitrage (exploiting the difference in price:

buy where is cheaper with aim to resell it at an higher price in another country). So arbitrage limits the possibility of a firm to

price differentiation, but not entirely precludes it, depending on the transportation costs.

We can find “parallel imports”: flows of commodities across frontiers, which are not made by authorized dealers but by

independent merchants who made this exports to exploit price differential.

st nd rd

Types of price discrimination: 1 , 2 , and 3 degree of price discrimination:

▪ st

1 Degree of price discrimination: each person face a different price (its reservation price), and price dis. absorb the entire

→

consumers surplus (leave no surplus to the consumers) each consumers pays the maximum sum he’s willing to pay.

)

Consider the case in which you have a discrete good, and the quantity that the consumer demands ( can take 2 values: 0

{0,1}.

→ ∈

if it doesn’t purchase or 1 if he purchase

( )

= , →

Utility function of the consumer: depends on the quantity of good x, and the amount of money that the

consumers keeps available for purchase other commodities. Suppose that the form of this utility function is:

( ) ( ) (0) (1)

= , = + = 0 = 0), = > 0

where the value of (when and (positive number).

In this way we assume that different individuals have different .

Now our problem is to determine the willingness to pay of each individual, that is to say the “reservation price” (the

maximum price one is willing to pay for the demand).

is the price that would makes the individual indifferent between buy and not to buy:

)

∶ (1; − = (0, )

→ + − = → equality between when the

individual purchase the item and when not.

→ = → so the reservation price is actually

the value of the good for the individual.

So in principle, if the firm knows the reservation price for

each individual, it might charge to each individual his

reservation price. Graphically it comes out:

Numerical Example: Suppose the firm does not price discriminate:

st

While Under 1 degree price discrimination:

= 10, = 8, = 7, = 5

1 2 3 4

= 10 + 8 + 7 + 5 − 4 × 3 = 30 − 12 = 18

->

No consumers’ surplus, but yet total surplus is higher than under uniform price:

= 7)

Under uniform pricing, consumers’ surplus (where was:

− = 10 − 7 = 3

1: 1

− = 8 − 7 = 1

2: 2

− = 7 − 7 = 0

3: 3 st

Instead, under 1 degree discrimination:

= 0; = 18 = 18

-> so we maximize tot surplus. The same level of tot surplus would be obtained

under perfect competition. Of course, the distribution of the surplus is “unfair”.

Now suppose we’ve a situation in which we have consumers with same characteristics, and a monopolist that does

not price discriminate, and fix a price :

-> This is the normal situation, but the monopolist can

obtain more by imposing beyond the price per unit, a

subscription fee, so what we call a “two-part tariff”. The fee

should not overcome the Consumer surplus, but in an

extreme case it could be equal to it:

()

< , = >

In this way the producer can set a lower price (p°°) to get

higher profits (since he sells more). The maximum surplus is

= .

obtained when ∗ ∗ ()

< = ; = >,

So the optimal two-part tariff for the producer is: and the producer surplus is equal to the

triangle, given entirely by the fee.

Lezione 22: (continua)

▪ rd

3 Degree of price discrimination: A practice whereby sellers sell at different condition at different groups of buyers. We

rd

talk of 3 degree of price discrimination when the characteristics of buyers that are use by the firms in order to price

discriminate are known to the firm.

As always, when talking about price discrimination, we must be careful in order to attribute the difference to the

relevant. In general the test that is made is the following: let’s says that the firm sells to buyers of group A (live in

≠

Germany) and the buyers of group B (live in Italy), at two different prices ( ). We talk of price discrimination if

the price difference (or the price ratio) differs significantly from the ratio of marginal cost:

≠

rd

So in this case we’ve 3 degree price discrimination, since the firm knows for any individual if he belongs to group A

or B and it is charging a different price to different group.

Now we’ve must address the problem of why the firms does charge a different price and what is the relevant

circumstances that justify difference in prices?

The answer is demand elasticity: the firm charges higher prices to the segment of the market which is characterized

by a lower elasticity of demand (in absolute terms). ,

Let’s call the two groups segment 1 and 2, so that the firm chooses .

1 2

C(q)= cost function faced by the firm

( ) ( )

=

= total demand function of segment 1; total demand function of segment 2

1 1 2 2

( ) ( ) ( ) ( ) ( ))

, = + − ( + → =0

1 2 1 1 1 2 2 2 1 1 2 2

1

1′ 1′

′

( ) ( ) ( ) ( )) ( )

(

→ + − + = 0

1 1 1 1 1 1 2 2 1

→

similar FoC for 2 ( )

1′ 1′ 1′ 1 1

( ) ( ) ( ) ( )

+ = + =

-> divide both side by -> -> multiply and divide by

1 1 1 1 1 1 1 1

′ ( )

1

( )

2&prime