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Wed 19 Apr, 2017 10:49 pm
I'm at a complete loss on how to get started with this problem, I feel like I'm missing information, but my professor said I should be able to solve this. Any direction or help would be appreciated.
3. Costly Tampering. Suppose a discriminating monopolist faces two types of consumers: high and low. Suppose there is one consumer of each type. Each consumer wants at most one computer chip sold by the monopolist. The chip can come in two qualities: fast and slow. Due to the production process, it is more expensive to produce the slow quality chip since it is obtained by first producing a fast chip and then tampering with it. Suppose it costs C dollars to transform a fast chip into a slow one.
The consumers’ dollar valuations for each kind of chip are given in the table below:
FAST QUALITY SLOW QUALITY
HIGH TYPE $900 $500
LOW TYPE $500 $400
Suppose the monopolist wishes to sell one chip to each consumer, and therefore will simply select the prices and quantities that maximize profits minus cost C whenever a chip is tampered with.
a. Suppose the monopolist can perfectly discriminate across consumers, e.g., the type of each consumer can be verified using an I.D. What qualities and prices will be offered?
Now suppose the monopolist cannot distinguish one type of customer from the other, and therefore consumers must self-select, i.e., each consumer must be at least as happy with the option designed for her.
b. What qualities and prices will be offered to the consumers when C = 0?
c. What is the highest level of C such that it is optimal to offer a slow quality chip to the low type instead of a fast chip?
Maybe if I had attended classes and had the study notes and-or textbook I'd be able to help you. But you have all that.