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Think about the markets for i) brown sugar and ii) luxury handbags and assume that luxury handbags are a differentiated product and brown sugar is a homogeneous product (products are identical across sellers).
a.) For which good would price be a more important criterion for consumers to make a buying decision? Why?
b.) Consider the producers in each market. In which market are they price-takers, and in which market are they price-setters? Why?
c.) Draw the following two models: a monopoly market for a differentiated product, and a perfectly competitive market. On each of your models show the profit-maximizing equilibrium point and show any areas of consumer surplus, producer surplus and deadweight loss. Label all relevant axes, points and curves on your model.
d.) Now assume that the firm in a monopoly market for a differentiated product had sufficient information and so much bargaining power that it could charge each consumer separately, and the maximum they would be willing to pay. What would be the equilibrium quantity in this market. Is this equilibrium a Pareto-efficient outcome? Is this outcome fair? Explain your answers by using your graph from part (c)
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