Why the two kinds of buyers might prefer different contracts

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Reference no: EM131908543

Question: 1. Monopoly distorts contracts by making prices too high. Why would a monopolist ever want to distort the nonprice term by, say, limiting liability for harm caused by defective products?

2. Assume that two kinds of buyers purchase contracts from a monopolist who promises to deliver goods in the future. One kind of buyer values the good more highly than the other. The monopolist would like to charge a higher price to the buyers who value the good more highly, but he cannot identify who they are. To overcome this problem, he offers two different contracts. One contract charges a high price and offers to pay high damages in the event that the seller fails to deliver the goods. The other contract charges a low price and offers to pay low damages in the event that the seller fails to deliver the goods. Explain why the two kinds of buyers might prefer different contracts. Explain why the monopolist might gain from offering two kinds of contracts. (In economic jargon, the "menu" of contracts "separates" the "pool" of buyers and permits "price discrimination.")

Reference no: EM131908543

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