Chapter 7 The Theory of the firm II: Market structure

7.1. Perfect competition

a. Assumptions of the model
- There is a large number of firms
- All firms produce identical or homogeneous products
- There is free entry and exit
- There is perfect (complete) information
- There is perfect resource mobility
b. Demand and revenue curves

- The demand curve for a good facing the perfectly competitive firm is perfectly elastic
(horizontal) at the price determined in the market for that good. This means the firm is a
price-taker, as it accepts the price determined in the market.
- The firm’s revenue curves: No matter how much output the perfectly competitive firms
sells, P = MR = AR and these are constant at the level of the horizontal demand curve.
This follows from the fact that price is constant regardless of the level of output sold.
 c. Profit maximization in the short run
At the profit-maximizing level of output Q:
- If P > ATC, the firm makes supernormal profit (positive economic profit).
- If P = ATC, the firm breaks even, making zero economic profit, though it is earning
normal profit.
- If P < ATC, the firm makes a loss (negative economic profit)
Making economic profit, breaking even and shutting down in the short run
- When P > ATC at the level of output where MC = AR, the firms earns positive economic
profit (supernormal profit)

- The price P = minimum ATC is the firm’s break-even price. At this price the firm is
breaking even: it is making zero economic profit but is earning normal profit.

- When ATC > P > AVC at the level of output where MC = MR, the firm is making a loss
but should continue producing because its loss is smaller than its fixed cost. Graphically,
this occurs when the demand curve lies below minimum ATC and above minimum AVC.

- At the price P = minimum AVC is the firm’s shut-down price in the short run. At this
price, the firm’s total loss equal to its total fixed cost.
- When price falls below the shut-down price, so that P < minimum AVC, the firm should
shut down in the short run and will make a loss equal to its fixed costs.
 d. Calculating economic profit or loss
- The short-run supply curve of the perfectly competitive firms is the portion of its
marginal cost curve that lies above the point of minimum AVC.

e. Profit maximization in the long run

- Normal profit in the long run:

o In perfect competitive long-run equilibrium, firm’s economic profits and losses
are eliminated, and revenues are just enough to cover all economic costs so that
every firm earns normal profit.
- Moving from short-run equilibrium to long-run equilibrium
- When the loss-making firm exits the market in the long run
In the long run, a loss – making firms shuts down and exits the market when price falls
below minimum ATC.

f. The shut-down price and the break-even price

- Shutting down in the short-run and the long-run: the shut-down price
o The short-run shut-down price is P = minimum AVC: the firm shuts down (stops
producing) when price falls below minimum AVC.
o The long-run shut-down price is P = minimum ATC: the firm shuts down (leaves
industry) when price falls below minimum ATC.
- The break-even price: the same for both the short-run and the long-run, and is where P =
minimum ATC. The firm earns normal profit (zero economic profit).

g. Allocative and productive (technical) efficiency

- Allocative efficiency:
o Occurs when firms produce the particular combination of goods and services that
consumers mostly prefer. The condition is the following:
 o Allocative efficiency is achieved when P = MC.
- Productive (technical) efficiency
o Productive (technical) efficiency occurs when production takes place at the lowest
possible cost. The condition is the following:
o Productive efficiency is achieved when production occurs at minimum ATC.
- Efficiency and perfect competition

o In the long-run equilibrium under perfect competition, the firm achieves both
allocative efficiency (P = MC) and allocative efficiency (production at minimum
ATC). At the level of the industry, social surplus (consumer plus producer
surplus) is maximum and MB = MC.
o In the short-run, the perfectly competitive firm achieves allocative efficiency but
is unlikely to achieve productive efficiency.
h. Evaluating perfect competition
- Insights provided by the model:
o Allocative efficiency
o Productive efficiency
o Low prices for consumers
o Competition leads to the closing down of inefficient producers
o The market responds to consumer tastes
o The market responds to changes in techn
o
o ology or resource prices
- Limitations of the model:
o Unrealistic assumptions
o Limited possibilities to take advantages of economies of scale
o Lack of product variety
o Waste of resources in the process of long-run adjustment
 o Limited ability to engage in research and development
o Market failure

7.2. Monopoly
a. Assumptions of the model
- There is a single seller or dominant firm in the market
- There are no close substitutes
- There are significant barriers to entry.
b. Barriers to entry
- Economies of scale
- Branding
- Legal barriers
o Patents
o Licenses
o Copyrights
o Public franchises
o Tariffs, quotas and other trade restrictions
- Control of essential resources
- Aggressive tactics
c. Demand and revenue curves under monopoly
- The demand curve facing the monopolist

Since the pure monopolist is the entire industry, the demand curve it faces is the industry or
market demand curve, which is downward-sloping. This is the most important difference
between the monopolist and the perfectly competitive firm, which faces perfectly elastic demand
at the price level determined in the market.
 - The monopolist’s revenue curves

d. The monopolist’s output and price elasticity of demand

The monopolist will not produce any output in the inelastic portion of its demand curve (which is
also its average revenue curve).
e. Profit maximization by the monopolist
The monopolist interested in maximizing profit (or minimizing loss) follows:
- Using the MC = MR rule
- Determines profit per unit or loss per unit by using:

o If P > ATC, the monopolist is making a profit

o If P = ATC, it is earning normal profit (zero economic profit)
 o If P < ATC, it is making a loss
o

- The firms multiplies by Q to determine total profit or by Q to determine total

loss.

Under monopoly, high barriers to entry prevent potential competitor firms from enterring a
profit-making industry, and the monopolist can therefore continue making economic
(supernormal) profits indefinitely in the long run.
f. Revenue maximization by the monopolist
- Comparing revenue-maximization with profit maximization

The profit maximiser equates MC with MR, and produces quantity Qπ which it sells at price Pπ .
The revenue maximiser produces quantity Qr which it sells at price Pr .
g. Natural monopoly

If the market demand for a product is within the range of falling LRATC, this means that a single
large firm can produce for the entire market at a lower average total cost than two or more
smaller firms. When this occurs, the firm is called a natural monopoly.
h. Monopoly market outcomes and efficiency

- Higher price and lower output by the monopolist compared to the industry in perfect
competition:
 - Allocative inefficiency: loss of consumer and producer surplus

- Allocative inefficiency: P > MC

In monopoly the underallocation of resources to the good is indicated also by P > MC at the
profit-maximizing level of output.
- Productive inefficiency: production at higher than minimum ATC
The monopolist produces at higher than minimum average total cost, and there is therefore
productive inefficiency.
- Lack of competition in monopoly may lead to higher costs (X-inefficiency)
 X-inefficiency defined as producing at a higher than necessary ATC.

- Why a monopoly may be desirable:

o Product development and technological innovation
o Possibility of greater efficiency and lower prices due to technological innovations
o Economies of scale
i. Legislation and regulation to reduce monopoly power: an evaluation
- Legislation to reduce monopoly power
o Legislation to protect competition: most countries have laws that try to promote
competition by preventing collusion between oligopolistic firms for the purpose
of restricting competition between them, as well as preventing anti-competitive
behavior by a single firm that dominates a market. The objective is to try to
prevent monopolistic behavior by one or a group of firms and achieve a greater
degree of allocative efficiency.
o Legislation in the case of mergers: a merger is an agreement between two or more
firms to join together and become a single firm. Mergers may occur for a number
of reasons such as an interest in capturing economies of scale or an interest in
firm growth or interest in acquiring monopoly power, which is made possible by
the larger size of the new, large firm.
- Regulation of natural monopoly
o Marginal cost pricing:
The best or optimal policy is forced the monopoly to charge a price to marginal cost, since with
P = MC, the monopolist would achieve allocative efficiency  marginal cost pricing.
 o Average cost pricing: to avoid creating losses for the natural monopolist,
governments can force the firm to charge a price equal to its average total cost (P
= ATC)  average cost pricing.
h. Advantages and disadvantages of monopoly compared with perfect competition
- Price and output: the monopolist produces a smaller quantity of output and sells it at a higher
price than a perfectly competitive industry.
- Efficiency: monopolist’s failure to achieve allocative efficiency when MB > MC, indicates that
the monopolist underallocates resources to the production of a good, and consumers would be
better off if more of the good were produced.
- Research and development (R&D): firms in perfect competition are unlikely to engage in R&D
for several reasons. They have no economic profits in long-run equilibrium with which they can
finance R&D. Monopolies have economic profits they can maintain over the long run because of
their monopoly position and this gives them the financial resources they need to pursue R&D.
- Economies of scale: firms in perfect competition have no possibility of achieving economies of
scale because of their small size. Monopolies, because of their size, are vey well placed to take
advantage of economies of scale and may use these to create to entry of new firms. Economies of
scale offer advantages in the form of lower average costs and lower prices as well as greater
quantities for consumers, and could possibly approach those achieved in perfect competition.

7.3. Monopolistic competition

7.3.1. Assumptions of the model
- There is a large number of firms
- There are no barriers to entry and exit
- There is product differentiation
 o Physical differences – products may differ in size, shape, materials, texture, taste,
packaging, etc.
o Quality differences – products can differ in quality
o Location – some firms attempt to differentiate their product by locating
themselves in areas that allow easy access for customers
o Services – some firms offer specific services to make their products more
attractive
o Product image – some firms attempt to create a favorable image by use of
celebrity advertising or endorsement, by brand names, or attractive packaging.
7.3.2. Product differentiation and the demand and revenue curves
a. Elements of competition and monopoly
This market structure combines elements of both competition and monopoly.

b. The roles of price and non-price competition

Price competition occurs when a firm lowers its price to attract customers away from rival firms,
thus increasing sales at the expense of other firms.
Non-price competition occurs when firms use methods other than price reductions to attract
customers from rivals. The most common forms of non-price competition are product
differentiation, advertising and branding.
Monopolistically competitive firms engage heavily in product differentiation through R&D in
product development as well as in advertising and branding.
Monopolistically competitive firms compete with each other on the basis of both price and non-
price competition. The more successful they are in increasing their sales and market share
through non-price competition, the less they need to rely on price competition. In contrast,
firms that are less able to achieve consumer loyalty for their product, and whose product is less
differentiated from substitutes, may have to rely more on price competition to increase their sales
and market share.
7.3.3. Profit maximization
a. Economic (supernormal) profit or loss in the short run

The short-run equilibrium position of the individual firm in monopolistic competition is identical
to that of the monopolist, the only difference being in the price elasticity of demand of the
demand curve facing the firm, as the demand curve is more elastic and flatter in monopolistic
competition than in monopoly.
In the short run, the firm can make either supernormal profit, normal profit or losses.
The firm applies the MR = MC rule to find the profit-maximizing or loss-maximizing level of
output and then for that level of output compares price with ATC to determine profit per unit or
loss per unit.
b. Normal profit in the long run
In monopolistic competition, in the long run, profit-making industries attract new entrants; in
loss-making industries, some firms shut down and exit the industry. The process of entry and exit
of firms in the long run ensures that economic profit or loss is zero and all firms earn normal
profit.
- The profitable industry:
In the long run, when firms can adjust their sizes by changing their fixed inputs, economic profit
draws new entrants into the industry. As new firms enter, they attract customers away from the
existing firms  shift the demand curve to the left  reach the point where it is tangent to the
ATC curve  firms in the industry earn normal profits and entry of new firms into the industry
stops.
The long run equilibrium of the monopolistically competitive firm: at the level of output where
MR = MC, P = ATC  economic profit is zero and each firm is earning normal profit.
- The unprofitable industry:
The presence of losses will make some firms shut down completely and leave the industry in the
long run  customers switch their purchases to the remaining firms which experience an
increase in demand for their product  rightward shift of the demand curve  continues until
losses disappear and firms are earning normal profit when the demand curve is tangent to the
ATC curve MR = MC, P = ATC  economic profit is zero.
c. Criticism of the model
- Firms make decisions only on quantity of output and price, whereas, as we have seen, a
major aspect of their decisions in fact involves non-price competition. Profit-
maximization decisions are more complex than the model indicates.
- In the real world, entry into the industry may not be as free as the model suggests, and
this is another factor leading to some monopoly power.
- Another difficulty is that in view of product differentiation, it is not possible to derive an
industry demand curve, as each product is different from the others  we can only
examine monopolistic competition at the level of the firm.
7.3.4. Efficiency in monopolistic competition
a. Allocative and productive inefficiency
Allocative efficiency is given by the condition P = MC, and productive efficiency by the
condition that production takes place at minimum ATC.
At the long-run equilibrium of the firm monopolistic competition, neither allocative nor
productive efficiency is achieved.
Comparing price with marginal cost along the vertical line at the equilibrium level of output,
price is higher than MC  there is an underallocation of resources to the production of the good:
society would have liked to have more units of the good produced.
b. Productive inefficiency, product differentiation and excess capacity
A firm’s capacity output is that output where ATC is minimum  this is the output level at
which the firm’s capacity is fully used.
The difference between capacity output and profit-maximizing output is called excess
capacity. This is the amount of output that is lost when firms underuse their resources and
produce an amount of output that does not minimize ATC.
7.3.5. Comparison of monopolistic competition with other market structure
a. Monopolistic competition and perfect competition
- Numbers of firms: large number of firms
- Free and entry and exit: no barriers
- Normal profit in the long run, supernormal profit or loss in the short run: both
- Market power and the demand curve:
 Monopolistic competition: yes; downward sloping
 Perfect competition: no; horizontal
- Productive and allocative efficiency
 Monopolistic competition: no
 Perfect competition: yes
- Excess capacity
 Monopolistic competition: Qc at ATC min
 Perfect competition: no
- Product variety:
 Monopolistic competition: yes  product differentiation
 Perfect competition: no
- Economies of scale
 Monopolistic competition: yes  small room and small degree
 Perfect competition: no
b. Monopolistic competition and monopoly
- Numbers of producers:
 Monopolistic competition: large number of producers
 Monopoly: single or dominant firm
- Size of firms
 Monopolistic competition: small
 Monopoly: large
- Barriers to entry
 Monopolistic competition: no
 Monopoly: yes
- Normal and economic profits
 Monopolistic competition: normal profits in long run
 Monopoly: economic profit in long run and short run
- Competition and prices
 Monopolistic competition: price competition and non-price competition
 Monopoly: no
- Market power: yes for both
- Allocative and productive efficiency: downward sloping  inefficiency
- Competition and costs:
 Monopolistic competition: yes based on ATC
 Monopoly: no
- Economies of scale:
  Monopolistic competition: yes, small room and small level
 Monopoly: yes and large level
- Research and development:
 Monopolistic competition: yes to competition
 Monopoly: no
7.4. Oligopoly
7.4.1. Assumptions
- There is a small number of large firms
- There are high barriers to entry
- Products produced by oligopolistic firms may be differentiated or homogenous
(undifferentiated)
- There is mutual interdependence
7.4.1.1. Strategic behavior and conflicting incentives
- Strategic behavior: based on plans of action that take into account rival’s possible courses of
action. Strategic behavior of oligopolistic firms is the result of their mutual interdependence.
- Conflicting incentives: firms in oligopoly face incentives that conflict, or clash with each other:
o Incentive to collude: collusion refers to an agreement between firms to limit
competition between them, using fixing price and lowering quantity produced.
They reduce uncertainties resulting from not knowing how rivals will behave, and
maximize profits for the industry as a whole.
o Incentive to compete: at the same time, each firm faces an incentive to compete
with its rivals in the hope that it will capture a portion of its rivals’ market shares
and profits  increasing profits at the expense of other firms.
7.4.1.2. Explaining oligopolistic behavior by use of game theory
- Game theory is a mathematical technique analyzing the behavior of decision-makers who are
dependent on each other, and who use strategic behavior as they try to anticipate the behavior of
their rivals.
- Game theory has become an important tool in microeconomics, and is based on the work of
American mathematician and economist John. F. Nash who together with John Harsanyi and
Reinhard Selten, received the 1994 Nobel Prize Economics.
- The game illustrates the prisoner’s dilemma, showing how two rational decision-makers, who
use strategic behavior to maximise profits by trying to guess the rival’s behavior, may end up
being collectively worse off. The final position that results from the game is called a Nash
equilibrium.
- The Nash equilibrium shows that there is sometimes a conflict between the pursuit of
individual self-interest and the collective firm interest. This conflict is the prisoner’s dilemma.
Although the firms could be better off by cooperating, each firm, trying to make itself better off,
ends up making both itself and its rival worse off..
- This game illustrates may real-world aspects of oligopolistic firms, which:
o Are mutually interdependent – what happens to the profits of one firm depends on the
strategies adopted by other firms – strategic interdependence.
o Display strategic behavior – their actions based on guesses about what their competitors
are likely to do
o Face conflicting incentives – face the incentive to collude and face incentives to compete
or “cheat” on the agreement by lowering their price
o Become worse off as a result of price competition – price war
o Have a strong interest in avoiding price wars, because everyone will become worse off
through price cutting  strong incentive to compete on the basis of factors other than
price.
7.4.1.3. The concentration ratio
- A concentration ratio provides an indication of percentage of output produced by the largest
firms in an industry. There is no fixed number of firms for which a concentration is calculated.
- A concentration ratios are used to provide an indication of the degree of competition in an
industry. The higher the concentration ratio, the lower the degree of competition.
- Concentration ratios have several weakness that limit their usefulness as a measure of the
degree of competition:
o Do not reflect competition from abroad
o Provide no indication of the importance of firms in the global market
o Do not account for competition from other industries which may be important in the case
of substitute goods
o Do not distinguish between different possible sizes of the largest firms

7.4.2. Collusive oligopoly

Collusion in oligopoly refers to an agreement between firms to limit competition, increase
monopoly power and increase profits.
The most common form of collusion involves price-fixing agreements.
Collusion is illegal in most countries because it works to limit competition. Collusion may be
formal, taking the form of a cartel or it may be informal, such as price leadership.
7.4.2.1. Open/formal collusion: cartels
- A cartel is a formal agreement between firms in an industry to take actions to limit competition
in order to increase profits  formal collusion (or open collusion)
- The key objective of a cartel is to limit competition between the member firms and attempt to
maximize joint profits. Cartel members collectively behave like a monopoly.

7.4.2.2 Obstacles to forming and maintaining cartels

- The incentive to cheat
- Cost differences between firms
- Firms face different demand curve
- Number of firms
- The possibility of a price war
- Recessions
- Potential entry into the industry
- The industry lacks a dominant firm

7.4.2.3. Tacit/informal collusion: price leadership and other approaches

- Tacit collusion (or informal collusion) refers to cooperation that is implicit or understood
between the cooperating firms, without a formal agreement.
- The objectives of tacit collusion are to coordinate prices, avoid competitive price-cutting,
limit competition, reduce uncertainties and increase profits.
- One type of informal collusion is price leadership, where a dominant firm in the industry
sets a price and initiates any prices changes.
- Obstacles to sustained price leadership are similar to the obstacles faced by cartels:
o Cost differences between firms, particularly in cases where there is significant
product differentiation, make it difficult for firms to follow a leader.
o Whereas some firms may follow the leader, others may not, in which case the
leader risks losing sales and market share if it initiates a price increase that is not
followed
o Firms still face the incentive to cheat by lowering their price to capture market
share and increase profits, a breakdown in price leadership can result in a price
war among firms.
o High industry profits can attract new firms that will cut into market shares and
profits of established firms and endanger the price leadership arrangement
o Price leadership, depending on where an how it is practiced, may or may not be
legal
- Another type of informal collusion involves informal agreements where agree to use a
rule for coordinating price. One such rule is limit pricing, where the firms informally
agree to set a price that is lower than the profit-maximizing price, thus earning less than
the highest possible profits and so discouraging new firms from entering the industry.

7.4.3. Non-collusive oligopoly: the kinked demand curve

Non-collusive oligopoly where oligopolistic firms do not agree, whether formally or informally,
to fix prices or collaborate in some way.
The kinked demand curve is a model that has been developed to explain price rigidities of
oligopolistic firms that do not collude.
This simple model illustrates three important points:
- Firms that do not collude are forced to take into account the actions of their rivals in
making pricing decisions
- Even though the firms do not collude, there is still price stability
- Firms do not compete with each other on the basis of price.

In the kinked demand curve model, each firm perceives the demand curve it faces to be elastic
for prices above P1 and inelastic for prices below P1. If one firm raises its price above P1, the
others will not follow; if it lowers its price below P1, the others will match the price decrease. In
either case, the firm will be worse off. Therefore, no firm takes the initiative to change its price,
and they all remain ‘stuck’ at point Z for long periods of time.
However, the model is subject to limitations:
- It cannot explain how the firms arrived at point X
- It is inappropriate as an explanation of oligopolistic pricing behavior during periods of inflation
and during recession to the point that at times they can set off price wars.
7.4.4. The role of non-price competition in oligopoly
Non-price competition is very important in oligopoly for the following reasons:
- Oligopolistic firms often have considerable financial resources that they can devote to both
R&D and advertising and branding. Whereas monopolistically competitive firms engage in non-
price competition, their resources for these purposed are generally not as large.
- The development of new products provides firms with a competitive edge, they increase their
monopoly power, demand for the firm’s product become less elastic, and successful products
give rise to opportunities for substantially increased sales and profits.
- Product differentiation can increase a firm’s profit position without creating risks for immediate
retaliation by rivals. It takes time and resources for rival firms to develop new competitive
products. It would be very difficult to engage in a ‘new product war’ as opposed to a price war,
in which price cuts can be very quickly matched or exceeded by rival firms.
7.4.5. Evaluating oligopoly (supplementary material)
a. Criticisms of oligopoly
- Neither productive nor allocative efficiency is achieved
- Higher prices are charged and lower quantities of output are produced than under
competitive conditions
- There may be higher production costs due to lack of price competition
- Whereas many countries have anti-monopoly legislation that protect against the abuse of
monopoly power, the difficulties of detecting and proving collusion among oligopolistic
firms means that such firms may actually behave like monopolies by colluding and yet
may get away with it.
b. Benefits of oligopoly
- Economies of scale can be achieved due to the large size of oligopolistic firms, leading to
lower production costs to the benefit of society and the consumer.
- Product development and technological innovations can be pursued due to the large
economic profits from which research funds can be drawn.
- Technological innovations that improve efficiency and lower costs of production may be
passed to consumers in the form of lower prices
- Product development leads to increased product variety, thus providing consumers with
greater choice.
c. Advantages and disadvantages of advertising
- The following arguments suggest that advertising can increase efficiency:
o Provides consumers with information about alternative products, it makes easier
for consumers to search for the product that is best suited to their needs, and
reduces time and effort wasted on searching for alternative products.
o Increases competition between firms and contributes to decreasing their
monopoly power
o Advertising facilities introduction of new products by providing information to
consumers, competition increases between firms
o By facilitating the introduction of new products, advertising can help lower
barriers to entry of new firms into an industry
 o By facilitating the introduction of new products, advertising can provide firms
with an extra incentive to engage in research and development for the
development of new products
- The following arguments suggest that advertising contributes to lowering efficiency:
o Huge sums spent on advertising by large oligopolistic firms can create barriers to
the entry of new firms that cannot match such expenditures
o Advertising increases costs of production and means higher prices for consumers
o Successful advertising increases a firm’s monopoly power
o Consumers may become confused and misled about product quality and may pay
higher prices for inferior products
o Advertising may create needs that consumers would not otherwise have, resulting
in a waste of resources as consumers buy goods and services they would not have
wanted if they were not influenced by advertising.
7.5. Price discrimination – Phan biet gia
7.5.1. Definition and conditions for price discrimination
a. The single-price firm versus the price-discriminating firm
In our study of firm behavior we have assumed that firms under all market structures charge a
single price for all units of output they sell.
Price discrimination is the practice of charging a different price for the same product to
different consumers when the price differences is not justified by differences in costs of
production.
b. Conditions for price discrimination
- The price-discriminating firm must have some market power: the price discrimination
firm must have some degree of market power, or some ability to control price  it must
face a downward-sloping demand curve  price discrimination can occur in all market
structures except perfect competition.
- Separation of consumers into groups to avoid the possibility of resale: consumers must be
separated from each other on the basis of some characteristic, such as time, geography,
age, gender, technology, income or other factors. Firms differentiate their prices on the
basis of these characteristics.
- Different price elasticities of demand: consumers must have different price elasticities of
demand (PEDs) for the good. This is because consumers with a relatively low PED will
be willing to pay a higher price for a good than consumers with a relatively lower PED.
7.5.2. Third-degree price discrimination
Third-degree price discrimination is based on the principle that different consumer groups have
different price elasticities of demand for a product. This is the most common type of price
discrimination, occurring when consumers are separated into different groups  discrimination
among consumer groups.
The firm changes higher prices to consumers with a lower PED and lower prices to those with a
higher PED.

7.5.3. Effects of price discrimination (supplementary material)

The results of third-degree discrimination are very complex and ambiguous as they depend on a
variety of factors, making it difficult to draw general conclusion:
- There is a possibility of increased monopoly power
- Total output may increase or decrease
- If output increase, then under certain conditions allocative efficiency will improve; if
output falls, then allocative efficiency will worsen.
- Prices will be lower for some groups and higher for other groups, compared to the single
price charged by the single-price firm
- Consumer surplus increases for some groups and it decreases for other groups
- What happens to overall consumer surplus depends on what happens to output.