Deadweight loss due to market power of sellers

From Market
Revision as of 13:40, 7 June 2014 by Vipul (talk | contribs) (Created page with "This page discusses a form of deadweight loss that occurs in the case that sellers have market power (i.e., they have some flexibility to set prices) but they are still re...")
(diff) ← Older revision | Latest revision (diff) | Newer revision → (diff)
Jump to: navigation, search

This page discusses a form of deadweight loss that occurs in the case that sellers have market power (i.e., they have some flexibility to set prices) but they are still restrained from price discrimination. The combination of market power and the inability to practice perfect price discrimination is crucial for this form of deadweight loss.

The core idea is that because of market power, sellers may price goods higher than they otherwise would, in order to reap greater profit margins per unit despite lower quantity of sales. As a result, some buyers are priced out. If the sellers had the flexibility to perfectly price discriminate, this situation would not occur: the seller would sell at the higher prices to those buyers who have higher reservation prices and at lower prices to those buyers who have lower reservation prices.