Question from Past Microeconomics Qualifying ExamEdit
Spring 1999- Section I, Question one, George Mason University
True, False, Uncertain. Determine whether or not each of the following statements are true or false. Explain your reasoning briefly in a paragraph or two. (The explanation is often more important than the answer given). Include a carefully labeled diagram or game matrix if it helps to clarify your answer.
Perfect price discrimination leads to efficient outcomes. There are transfers but there are no efficiency losses.
Uncertain: The ‘traditional’ response to this question is that perfect price discrimination does lead to an efficient outcome. The monopolist engaged in the price discrimination will set the price of each unit sold such that the consumer pays the firm the full marginal benefit of the item consumed. The last unit sold will occur where MR=P=MC. The result is no consumer surplus and no deadweight loss. All gains accrue to the producer. In this sense, perfect price discrimination leads to an efficient outcome for the monopolist.
However, Posner (JPE, 1975) showed that the producer surplus will be entirely spent by a potential monopolists engaging in ex ante competition to assure he becomes the monopolist. The firm will expend resources in rent seeking activity in an amount that equals the potential producer surplus. Therefore, perfect price discrimination and pure rent seeking (assuming there are no socially useful byproducts) is the most inefficient situation possible. (Also see Frank p 419-421)
- Posner, Richard A. "The Social Costs of Monopoly and Regulation", 1975, JPE