Consider a monopolistic firm that sells its product exclusively online; the firm’s marginal cost is 2 and there is no fixed cost of production. Consumers can be grouped into two categories: – type A: avid consumers whose demand function is given by ???? = 18 – 3?? – type B: regular consumers whose demand function is given by ???? = 10 – 2??. Assume for simplicity that there is only one consumer of each type. a) Since sales are online, the monopolist cannot differentiate consumers based on any observable characteristics. Find the uniform price it would charge and obtain its profits. Which market(s) will be served? (7 points) © UCD 2020/2021 Page 4 of 6 b) Suppose that the monopolist is now allowed to charge a price p and a fixed fee T. Find the optimal two-part tariff it would set. Which market(s) will be served? (7 points) The monopolist is now considering buying data from Google. This acquisition would allow the monopolist to retrieve information on consumers’ preferences in real time, and to identify the consumers as type A or B as soon as they start navigating the website. c) Find the equilibrium prices under third degree price discrimination and the optimal two-part tariffs. How much is the monopolist willing to pay for the data assuming it is free to decide whether to charge a fixed fee or not? (6 points) d) Should a government who wishes to maximize total surplus fight the sale of ‘big data’ in such a market? Should it allow the monopolist to charge a fixed fee? Support your answers with economic arguments. (5 points) e) Take now the perspective of a consumer protection agency, who wishes to maximize consumer surplus. Discuss using economic arguments what would be its position towards – the sale of ‘big data’ – the pricing policies (price vs. two-part tariff)
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