This willingness to pay is directly observable by the monopolist.ĭefinition: The consumer's maximum willingness to pay is called the consumer's reservation price. Monopolyĭefinition: A policy of first degree (or perfect) price discrimination prices each unit sold at the consumer's maximum willingness to pay. Price DiscriminationMRDMCQuantityPriceP1PUEFGHJKNLCS: E+F 0PS: G+H+K+L E+F+G+H+J+K+L+NTS: E+F+G+H+K+L E+G+G+H+J+K+L+NDWL: J+N 0Uniform Price Monopoly 1st Degree P.D. Price DiscriminationMRDMCQuantityPriceUniform Price Monopoly 1st Degree P.D. The monopolist can overcome this by charging more than one price for its product.ĭefinition: A monopolist price discriminates if it charges more than one price for its output. While the monopolist captures profits due to an optimal uniform pricing policy, it does not receive the consumer surplus or dead-weight loss associated with this policy. *Definition: A monopolist charges a uniform price if it sets the same price for every unit of output sold. Tie-in SalesRequirements Tie-insPackage Tie-ins (Bundling) Iron and Steel Industry, 1907–1930,” The Review of Economics and Statistics, 67 (August 1985): 429–437.Chapter 12: Pricing to Capture Surplus Valueįirst Degree Price DiscriminationSecond Degree Price DiscriminationThird Degree Price Discriminationģ. Yamawaki, “Dominant Firm Pricing and Fringe Expansion: The Case of the U.S. Scherer, Industry Structure, Strategy, and Public Policy (New York: HarperCollins, 1996), p. Steel’s Pricing, Investment Decisions, and Market Share, 1901–1938,” Journal of Economic History, 49 (September 1989): 593–619. The quotation below and the data in Table 13.5 come from T. Scherer in Chapter 5 of his book Industry Structure, Strategy, and Public Policy ( New York: HarperCollins, 1996). Steel’s history and dominant firm pricing behavior by F. This example was inspired by a fuller and more detailed discussion of U.S. Based on this evidence, we can conclude that the logic of the dominant firm model nicely fits competitive dynamics in the U.S. Steel significantly influenced the fringe’s rate of production and the rate at which the fringe expanded over time. Steel’s pricing decisions were influenced by the market share of fringe producers. Steel and rival firms) from that era, Yamawaki shows that U.S. Steel actually behaved this way.22 Using data on steel prices and production (by U.S. Hideki Yamawaki provides some statistical evidence that U.S. And as we saw from Figure 13.8, with an expanding fringe, this implied an erosion of the dominant firm’s share over time. Steel to eschew an aggressive limit pricing strategy and instead set prices at or close to the levels implied by the dominant firm model. As a result, it probably made sense for U.S. It required building an integrated steel mill, and in those days it was not easy to secure either financial capital or reliable sources of iron ore. Those of its rivals, actual or potential.”21 In addition, as Scherer notes, entry into the steel industry in the early twentieth century took time. Scherer writes, “Although some of the Corporation’s plants may have had lower costs, on average USS could pour and shape steel at costs no lower than Steel probably did not have an appreciable cost advantage over its competitors. Steel believe that before World War II (1941–1945), U.S. Scholars who have studied the history of U.S. Steel follow an aggressive strategy of limit pricing to slow the expansion by rival firms? Our discussion of dominant firm pricing sheds light on this question. It neither tried vigorously to retain its existing markets nor to take advantage of new growth opportunities in structural and rolled markets. Instead of raising barriers to entry into the steel industry, it lowered them. Steel followed patterns of pricing and investment that guaranteed an erosion of its market share. McCraw and Forest Reinhardt: For three decades, U.S.
According to economic historians Thomas K. Steel’s market share soon began to decline, and by the mid-1930s, it had fallen to 33 percent of the market. Steel produced 66 percent of the steel ingot sold in the United States.
In fact, when it was formed (by merger) in 1901, U.S. Steel currently accounts for less than 15 percent of U.S. Steel group of the USX Corporation is one of America’s largest steel companies.
Steel: The Price of Dominance20 TABLE 13.5 With sales of over $6 billion, the U.S. O L I G O P O LY W I T H H O R I Z O N TA L LY D I F F E R E N T I AT E D P R O D U C T S Braeutigam Copyright © 2009 – The McGraw-Hill Companies srl Microeconomia 2/ed David A.