\documentstyle[12pt,epsf]{article} %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% %TCIDATA{OutputFilter=Latex.dll} %TCIDATA{LastRevised=Thu Feb 01 10:39:13 2001} %TCIDATA{} %TCIDATA{CSTFile=article.cst} \parskip 10pt \reversemarginpar \topmargin -.4in \oddsidemargin .25in \textheight 8.7in \textwidth 6in \pagestyle{myheadings} \markboth{ }{} \input{tcilatex} \begin{document} \parindent 24pt \titlepage \vspace*{12pt} \begin{center} {\large {\bf Notes for: Bargaining in Price Discrimination } \\[0pt] } January 31, 2001 \\[0pt] \bigskip Eric Rasmusen \\[0pt] {\it Abstract} \\[0pt] \end{center} The standard models of monopoly and price discrimination rest on a hidden assumption: that the seller can make take-it-or-leave-it offers. If this is not possible, the amount of surplus the seller can claim falls, even if one seller faces a large number of small buyers. In the absence of transactions costs, each small buyer would be in a position of bilateral monopoly with the seller, and the seller's profit would be much less than in the usual analysis of perfect price discrimination. {\small \noindent \hspace*{20pt} Professor of Business Economics and Public Policy and Sanjay Subhedar Faculty Fellow, Indiana University, Kelley School of Business, BU 456, 1309 E 10th Street, Bloomington, Indiana, 47405-1701. Office: (812) 855-9219. Fax: 812-855-3354. Erasmuse@indiana.edu. Php.indiana.edu/$\sim$erasmuse. Copies of this paper can be found at http://Php.Indiana.edu/$\sim$erasmuse/papers/Pdisc.pdf. } {\small I would like to thank Michael Alexeev,Maria Arbatskaya, David Hirshleifer, John Lott, and Thomas Lyon for helpful conversations on this topic. Footnotes starting with xxx are notes to myself for future revisions. } %%-----------------------------%----- \newpage \noindent 1. INTRODUCTION What is the source of monopoly power? Economists have evolved considerably in their thinking on this issue. The naive answer is that if a seller is large and buyers are small, the seller can set his own price rather than take a market price as given, and this large size is the source of monopoly power. A more sophisticated analyst will note that this is not quite right: it is not size alone, but size relative to the industry that matters, and since a large firm in a large industry may have very little control over prices. In this view, it is concentration that matters, not size. Going a little further, one might add a caveat regarding entry: even if a firm is alone in its market, if entry is easy, then it may have no market power; barriers to entry are the key to monopoly power. This is the lesson of the contestability literature.\footnote{% On contestability, see, for example, Baumol (1982), Baumol, Panzar and Willig (1982), or Fernandez and Rasmusen (1997).} Or, even if the seller is alone in a market and entry is impossible, it may be that close substitutes to its product exists, so it can raise the price by very little; lack of potential substitutes for one's product is the source of market power. This was the argument that saved Dupont from anti-trust sanctions in the famous {\it Cellophane} case.\footnote{% United States v. E. I. du Pont de Nemours, 351 U.S. 377 (1956).} All of these may be combined in the answer that the source of market power is the inelasticity of the demand curve facing the seller. In this article, I would like to point out that although inelasticity in the demand curve is the first qualification for monopoly power, it is not so powerful a generator of profits as is usually supposed. Just as important is bargaining power. We standardly assume, without much thought, that the seller can make a take-it-or-leave-it offer to the buyers. If he cannot, our standard theory of monopoly is incorrect. This can be most easily seen in the context of perfect price discrimination. We usually think of perfect price discrimination as yielding the entire gains from trade, the sum of producer and consumer surplus, to the seller. For this reason, a monopolist would always prefer perfect price discrimination to using a single price, if information and resale possibilities permit.\footnote{% See, for a recent, example, Edlin, Epelbaum \& Heller (1998), which goes on to see whether perfect price discrimination is efficient in a general equilibrium setting.} This is not true,however, unless the seller can make take- it-or-leave-it offers. And if it is not true, the seller might be better off {\it not} being able to price discriminate. Consider the case when one seller with a constant marginal cost of $C$ faces buyers $i= 1, ..., N$ with reservation prices $\overline{P_1}, ..., \overline{P_ N}$, each buying one unit. According to the usual story, the monopolist will charge prices $\overline{P_1},..., \overline{P_ N}$, for a profit of $\sum_i^N (\overline{P_1} - C)$. This is inconsistent with the usual story for what would happen if our one seller faced only one buyer, buyer $1$. In that case, we would label the situation as bilateral monopoly, and perhaps predict that the monopolist would charge the price $(\overline{P_1}-C)/2$, splitting the surplus with the buyer, who is now called a monopsonist. We would not be very sure of the answer, because when both traders act strategically, the situation is one of bargaining, for which we do not have a solid theory for so unstructured a situation, but we certainly would not predict the price to be $(\overline{P_1% }-C) $. Yet what is different in the situation of perfect price discrimination? Only that instead of one bilateral monopoly, there are $N$ of them, one for each buyer. The seller is a monopoly because of his uniqueness, but each buyer is a monopsonist because he is the unique source of his own demand. The monopolist's profit would not be $\sum_i^N (\overline{P_1} - C)$, but only half of that amount, if each side is equally good at bargaining. There are a number of reasons why the one large seller might be able to make take-it-or-leave-it offers in real-world contexts. I will discuss these later, but I would like to dismiss one reason immediately: that a buyer will be a price-taker simply because he is small relative to the seller. This is to confuse the ability of a buyer to influence the market price, or a single monopoly price in a large market, with his bargaining position in one-on-one bargaining. The buyer may indeed be too small to much affect the market price or a single monopoly price, but in one-on-one bargaining, he represents one hundred percent of demand. If the seller finds it to his interest to reduce his price to sell to a particular buyer, he will do so. When the seller chooses one price for each buyer, buyer and seller are symmetrically placed. If it worthwhile for the seller to make a special offer to this buyer, so too is it worthwhile for that buyer to make a special counteroffer to the seller. Perfect price discrimination reduces them to equals in a tiny submarket. This way of looking at monopoly has curious implications. Section 2 of this article will look further at perfect price discrimination, and compare its profits with standard monopoly pricing for a variety of specifications of supply and demand. Section 3 will clarify the problems the bargaining approach raises for simple monopoly pricing, without being able to solve them. Section 4 lists a number of ideas that will have to be sorted out in a later version of this paper. Section 5 concludes. \bigskip \noindent 2. PERFECT AND bargaining PRICE DISCRIMINATION The standard model's conflation of inelastic demand with take-it- or-leave-it offers creates a problem of terminology. I will continue to use the term ``monopoly pricing'' for the situation where a single seller makes a single take-it-or-leave-it offer to all buyers.\footnote{% xxx Better: Single-price monopoly".} If resale is possible, or if the seller does not know the reservation prices of individual buyers, then monopoly pricing is equivalent to fully rational strategic pricing. Otherwise, as will be explained below, it is not. I will use the term ``perfect price discrimination'' for conventional perfect price discrimination, where a single seller makes a different take-it-or-leave-it offer for each unit of demand. I will use a model of a continuum of buyers and assume that each buyer buys one unit of output, so the seller will be making a continuum of take-it-or-leave-it offers. To be rational, this form of pricing relies not only on the ability to make take-it-or-leave-it offers, but also that the seller knows each buyer's reservation price and that resale is impossible. I will use the term ``bargaining price discrimination'' for the equivalent situation where the seller cannot make take-it-or- leave-it offers, but must instead bargain with each buyer separately. In this case, bargaining will occur between buyer and seller, and I will assume that they split the surplus equally, as in Nash (1950) and Rubinstein (1982). (This term might also be used when the price discrimination is not perfect and when the split is not equal, but in this article we will maintain those two assumptions.) Under bargaining price discrimination, the monopolist will capture not the entire consumer surplus, but half of it.. Let us assume a monopolist seller, a continuum of buyers, and strategic behavior by everyone involved. Modelling buyers as a continuum means assuming that each buyer is infinitesimal compared to the market as a whole. We will arrange consumers in order of decreasing reservation price, and assume that each consumer's purchase density is one unit. Thus, if the monopolist sells to all the consumers between points 0 and 1.5 on the quantity-axis of the demand diagram, he sells a total of 1.5 units. Let us begin by assuming that the marginal cost is constant at $c$. {\it EXAMPLE 1: Step Demand. Bargaining price discrimination is worse than monopoly pricing.} A seller with marginal cost constant at $c$ faces a continuum of consumers represented by the step function $Q^d = a$ if $P \leq a$, $Q^d = 0$ if $P > a$ , where $a>c.$\footnote{% xxx This should be replaced by step demand with two steps. At first--- here-- just do the special case of one step, setting the second reservation price to zero. Later, after convexity adn concavity (or maybe before) go to two steps.} \bigskip \epsfysize=2in \FRAME{ftbpF}{2.5598in}{2.0176in}{0pt}{}{}{fig1.gif}{\special{language "Scientific Word";type "GRAPHIC";maintain-aspect-ratio TRUE;display "USEDEF";valid_file "F";width 2.5598in;height 2.0176in;depth 0pt;original-width 5.0315in;original-height 3.9583in;cropleft "0";croptop "1";cropright "1";cropbottom "0";filename 'fig1.gif';file-properties "XNPEU";}} \begin{center} Figure 1: Pricing Under Step-Function Demand \end{center} If, as here, the demand curve is a step function with a single reservation price, then monopoly pricing is {\it better} than bargaining price discrimination. It earns twice the profits. Example 1 shows that a monopolist might actually like not to be able to engage in bargaining price discrimination. It is reminiscent of the Coase Conjecture in durable monopoly.\footnote{% xxx See Coase (1972) and references for Coase conjecture.} This has policy relevance. We should think twice before advising a company to introduce price discrimination--say, by acquiring better information on consumers, or changing its marketing practices so as to allow salesmen to give discounts. Or, the seller could purposely encourage resale, so as to have a credible reason not to give discounts from its single monopoly price. \bigskip It is by no means always the case, however, that price discrimination has lower profits than simple monopoly. In the next example, the profits from each type of selling will be equal. {\it EXAMPLE 2: Linear Demand. Bargaining price discrimination yields the same profit as monopoly pricing. } A seller with marginal cost constant at $% c$ faces a continuum of consumers represented by the linear demand curve $% Q^d = a-bP$, where $a>c.$\footnote{% xxx Set this up with linear demand for prices from $\underline{p}$ to $% \overline{p}$. Start with the simple and realistic case of $\underline{p} =0$% . Give a diagram witht eh density of consumer reservation prices.} Examples 2 has constant marginal cost and linear demand. Profits from bargaining price discrimination and monopoly pricing are identical. In Figure 2, monopoly profits are A+B. bargaining price discrimination profits are A+F. I will have to fill in the reasoning here as to why that is true, and why these are equal. \bigskip \epsfysize=2in \epsffile{ pdisc2.eps} \begin{center} Figure xxx: Pricing Under Linear Demand \end{center} The difference between Examples 1 and 2 makes one ask what kinds of demand functions yield this result. Proposition 1 addresses this question. PROPOSITION 1: {\it If the demand curve is convex and marginal cost is constant, profits are greater from monopoly pricing than from bargaining price discrimination.}\footnote{% In saying, ``convex'' and ``concave'' demand, I exclude the vertical part of the demand curve lying on the P axis.} PROOF. Start with an arbitrary convex demand curve. (1) Draw a tangent T0 to it at a point ($Q_0, P_0$) close to where T0 hits the P axis. This tangent,together with the two axes, forms a triangle. Q0 will be less than half the distance from the origin to where T0 hits the Q axis. If we continue with a series $(Q_i, P_i)$ where Qi is increasing, we will find that eventually, near the P-axis, there will be some Qn which is greater than half the distance from the origin to where tangent Tn hits the Q axis. In between, there is some T* such that Q* is exactly halfway between the origin and where T* hits the Q axis. (2) Lemma: If a rectangle is constructed by bisecting the base of a right triangle, that rectangle will have half the area of the triangle. \noindent Proof: Let the length of the triangle bases be L. The area of the rectangle is (1/2) L... xxxnot finished. (3) Using the lemma, at P*, the area of the profit rectangle is exactly half the area of the triangle formed by the axes and the tangent T*. The area of competitive consumer surplus is less than the area of that triangle, since demand is convex. Thus, the profit from P* is more than half the competitive consumer surplus. The monopoly profit must be at least as great as the profit from P*, and the profit from bilateral-monopoly perfect price discimination is half the competitive consumer surplus, so monopoly profit is greater than theprofit from bargaining price discrimination. \newline Q.E.D.\footnote{% xxx I think I can prove that concave demand yields the opposite result from Proposition 1 rather easily.} \FRAME{ftbpF}{2.655in}{2.0133in}{0pt}{}{}{fig2.gif}{\special{language "Scientific Word";type "GRAPHIC";maintain-aspect-ratio TRUE;display "USEDEF";valid_file "F";width 2.655in;height 2.0133in;depth 0pt;original-width 5.2295in;original-height 3.9583in;cropleft "0";croptop "1";cropright "1";cropbottom "0";filename 'fig2.gif';file-properties "XNPEU";}} \begin{center} {\bf Figure 3: Convex Demand} \end{center} \bigskip \bigskip \bigskip \bigskip\ \FRAME{ftbpF}{2.9577in}{2.4465in}{0pt}{}{}{fig3.gif}{\special% {language "Scientific Word";type "GRAPHIC";maintain-aspect-ratio TRUE;display "USEDEF";valid_file "F";width 2.9577in;height 2.4465in;depth 0pt;original-width 4.7919in;original-height 3.9583in;cropleft "0";croptop "1";cropright "1";cropbottom "0";filename 'fig3.gif';file-properties "XNPEU";}} \begin{center} {\bf Figure Concave Demand } \end{center} \bigskip What is the intuitive difference between convex and concave demand? Convex demand would indicate a lot of low reservation prices relative to high ones. Concave demand would indicate a lot of high reservation prices relative to low ones. For a simple monopolist, having a lot of similar high-reservation price consumers is better than having a lot of similar low-reservation price consumers. For a price discriminator, more high-reservation-price consumers is good, of course, but it is not so important. He can capture the surplus of even a few high-res-price consumers, whereas the simple monopolist has to give up on them.\footnote{% xxx Graph the density of consumers for convex and concave demand.} ANother way of putting this is that informational rents to each high consumer are larger if there are fewer of them. It would be interesting to compare the efficiency loss from simple monopoly for convex vs. concave demand too. For whcih is it higher? Note that this point holds for conventional perfect price discrimination too. The perfect price discriminator always makes more than the simple monpolist, but he makes a lot more if the demand curve is convex. Step demand examples could illustrate this. First, let the steps be close to each other. That is like concave demand, and monopoly pricing will do well. Second, let them be far apart. That is more like convex demand, andt he single price will do badly. Here, it would be worth noting what a price discriminator would do if he could pay z per unit demand to find out consumer reservation prices. IN example 1, he would definitely not pay it. When woudl he? Do this for perfect and bargaining price discrimination.\footnote{% xxx bargaining is a bad term. One that notes the bargaining would be better. Maybe just perfect price bargaining.} \bigskip \noindent 3. SINGLE-PRICE MONOPOLY The analytic approach of Section 2 seems to lead to the following paradox. Suppose we have a monopolist facing convex demand who charges just one price. That is the monopoly price, and his profits will be at some particular level. Suppose we let him charge two prices. His profits will rise, because he is facing less of a constraint-- he could, after all, set both prices equal to each other and be no worse off, or he could make them different and perhaps be better off. If we let him charge three prices, profit rises again. But if he charges N prices to N consumers, it seems that his profits fall! Where does the break come? The paradox is a false one. The difference is that under the bargaining price discrimination we have been discussing, it has been assumed that buyer and seller have equal bargaining power. If the seller has all the bargaining power, or, equivalently, can make take- it-or-leave-it offers, then we are back in the world of standard price discrimination, where perfect price discrimination is always better (or at least no worse ) than charging one monopoly price. Standard monopoly pricing has three key features, of which only two are fully appreciated. Those two are (a) there is only one seller, and (b) the seller can only charge one price. The third feature is (c) the seller can make a take-it-or-leave-it offer. What happens if the seller charges just one price, but he cannot commit to a price? This is a complicated game, with N+1 players, and we are only good at 2-person bargaining. So far, the analysis has compared price discrimination and monopoly pricing. But the comparison is not really a fair one. I have been comparing bargaining price discrimination, in which the the seller cannot commit to prices, with standard monopoly pricing, in which he can. \bigskip \noindent 4. BARGAINING POWER AND TRANSACTION COSTS (1) BARGAINING POWER AND SIZE. Whence comes differences in bargaining power? In many bargaining problems, it is based on the costs of delay for each side. In the context of monopoly sales, however, transaction costs are a more likely source. The monopolist may be enabled to make a take-it-or-leave it offer by transaction costs. If each offer is costly, then the monopoly may find it worthwhile to make one, while the customers, very small, do not find it wortwhile to make a counteroffer. Bargaining will not occur, because it is too costly. Thus, transaction costs can be good for the monopolist. Another advantage of a large seller facing many small buyers is that the seller attaches more value to reputation, and loses more if he makes a concession to any one buyer. A numerical example will serve to illustrate this.\footnote{% This example has much of the flavor of the ``Gang of Four'' model of Kreps, Milgrom, Roberts, \& Wilson (1982).} Suppose that a monopoly seller bargains publicly in sequence with buyers 1 through 200, each of whom will buy one unit if the price is less than 100. Assume that each buyer can make a take- it- or-leave-it offer of P, i.e., the buyers have all the bargaining power. The buyers, however, do not know whether the seller's constant marginal cost is 70 (to which they attach probability .9) or 80. If the game has reached Buyer 200 and the seller's true cost has still has not been revealed, then if Buyer 200's belief is still a .90 probability of C=70, the game is identical to a one-buyer game. The seller's Nash equilibrium strategy is simple; he accepts any offer equal to his cost or greater. The buyer will calculate that his expected payoff of 27 from offering P=70 (which is .9(30) + .1 (0)) is higher than his expected payoff of 20 from offering P=80 (which is .9(20) + .1 (20)) or from any other strategy. These, however, cannot be the strategies the players pursue throughout the game. Certainly if the seller's true cost is $C= 80$ he will follow a strategy of buying at any price $P \geq 80$. If a seller with $C=80$ is willing to buy at a lower price, however, and Buyer 1 is rejected upon offering $P =70$, then the succeeding buyers will want to offer $P=80$, having deduced that the seller's cost is $C=80$. Suppose, however, that the seller's true cost is $C=70$, and he is offered $P=70$ by Buyer 1. If he accepts, his overall payoff for the game will be 0, because every other buyer will also limit the price to 70. If he rejected Buyer 1, however, and this induces any other buyer to offer $P =80$, then the seller will end up with a positive payoff. Will any of the later buyers offer $P=80$? We know that the last buyer, Buyer 200, will not, unless he has somehow determined that the seller's true cost is 80, because in that last bargaining session, a seller with $C=70$ would accept $P=70$. In early rounds, however, a seller with $C=70$ will imitate a seller with $C=80$, rejecting low prices, because the seller will not want to reveal his type. Knowing that a low-cost seller has this incentive to conceal his type, the early buyers will give up and offer $P=80$% , for a profit of 20, instead of a $P=70$ that they know will be rejected with certainty. Thus, under incomplete information, the seller has an advantage in selling to multiple buyers. The seller's size is valuable, but only because a large seller has more to lose in future transactions from making concessions presently. A large seller will find bargaining price discrimination more profitable. (2) ECONOMIES OF SCALE. Car dealerships hire good bargainers as salesmen, and train them to be better. Consumers are not so used to bargaining. This is because the seller has economies of scale in bargaining. Thus, in some contexts we have theoretical reason to doubt the assumption of equal bargaining power used in this paper. In addition, the seller might be able to create transactions costs for haggling--- by requiring its agents to make take-it-or-leave-it offers, for example. This is tough for consumers to imitate. (3) TRANSACTION COSTS. Even perfect price discrimination can survive transaction costs. Suppose there is a continuum of firms that use telephone service, and their willingness to pay is proportional to their size. If the telephone company can observe size, it can specify a single {\it price function} and it is not much more costly than specifying a single {\it price.% } It is still very costly for each firm to make a counter-offer, however. \bigskip \noindent {\ 5.DIVERSE APPLICATIONS} (1) BUYER MARKET POWER AND THE LOST VOLUME PROBLEM. Suppose a small town has one car dealer. Will he be able to charge everyone their reservation prices? No, because in the bargaining, they know that if the seller loses this sale, it will not be replaced. The dealer will do well only if he uses a take-it-or-leave it approach and refuses to bargain. This is related to the lost-volume problem illustrated by the standard case of {\it Neri v. Retail Marine Corp}. Retail Marine agreed to sell Neri a boat for X dollars. Neri repudiated the contract. RM then sold the boat to person B at the same price. The court awarded damages to RM of \$ 2,579 in lost profit on account of the lost sales volume. Various authors have objected to this measure of damages, but it makes sense. The buyer, Neri, is irreplaceable. Even if Retail Marine had a monopoly on boats of this type, it could not force some other consumer to buy a boat and replace Neri. The lost-volume rule has been much studied, the literature including Goldberg (1984), Cooter and Eisenberg (1985), and Scott (1990). I hope I may have something to add to that. Let us use some simple numbers for concreteness. Neri orders a boat for 100 from Marine. Marine builds the boat at a cost of 60, and can build any number of boats at that cost. Neri cancels his order, and Marine sells that boat to Smith for 90. What damages should Marine be able to collect from Neri? The damage should be 40. Marine has lost 40 in profits from sales to Neri. It would have been able to make the 30 in profit from Smith in any case. (2) WHOLESALERS AND RETAILERS. The issue of size and market power comes up in the context of a monopolist or duopolist wholesaler facing many retailers who are monopolies in their own markets. How is this to be modelled? Frank Mathewson and Ralph Winter write, ``The theoretical explanation of why it is empirically reasonable to impute zero-monopsony power to buyers with small market shares is an open issue not explored here.'' (Mathewson \& Winter p. 1058). In their model, the game is set up so that wholesalers make take-it-or-leave-it offers. I suggest that although in particular contexts this may be appropriate for analytic convenience, it is not realistic. Robert Bork takes the view they are criticizing, saying, ``The retailer has alternative suppliers. Standard [the wholesaler] has no alternative outlet with which to reach customers in that town.''\footnote{% xxxx (page number?)} (3) SECRET DISCOUNTING AND CARTELS. It is a commonplace of industrial organization that the possibility of secret discounting undermines profits in cartels.\footnote{% xxx Add cite here. Scherer? Carlton?} The standard reasoning is that this allows members of the cartel to compete with each other for customers. As a result, the law should encourage secret discounting. American antitrust law's historical hostility to secret rebates is inconsistent with this, but that can be attributed to either its political basis (protecting businesses that cannot get the rebates) or to lack of understanding of economics. It is quite true that discounting undermines cartels, but the present paper suggests another reason why it hurts cartels and helps consumers: bargaining price discrimination. Suppose the cartel could allocate customers by territory, so that price competition among members was not a threat. Discounting would still hurt cartel profits, and would still be tempting because of bargaining with individual customers. This is even true of open discounting, but secret discounting has the additional danger that it undermines the reputational motive for a tough bargaining position that I described above with the example of incomplete information games. (4) LABOR UNIONS. The idea of bargaining price discrimination has implications for the desirability of unionization. An argument sometimes made is that the employer is large, and has market power, whereas the worker is small and has no market power. As a result, unionization is helpful to turn simple monopsony into bilateral monopoly.\footnote{% xxx Find a cite for this.} I have suggested that size is not what is important. Moreover, each worker does have market power, since he is the sole provider of his labor, whereas it is rare for an employer to have a monopsony. Hence, any justification for unionization must rely on other reasons why the worker's bargaining position is weak. (5) INTERNATIONAL TRADE. A basic dichotomy in international trade models is between large countries, which are big enough to influence world prices by their tariff levels, and small countries, which are not.\footnote{% xxx Find a cite for this.} A small country cannot benefit from imposing a tariff, because it cannot cause the terms of trade to change in its favor, but for a large country there is a positive optimal tariff.\footnote{% Optimality is here considered only with respect to the country's interest. From the point of view of world surplus, tariffs are always bad. For one country, however, they can be good, just as for one firm, acting as a monopolist rather than as a price-taker can be good.} If tariffs are the result of bargaining between large and small countries, however, and if resale can be prevented, then the situation is one of bargaining price discrimination. The small country's demand is irreplaceable, and it can bargain with the large country for a more favorable price. Pakistan, for example, might be a very minor consumer of coffee, but it could nonetheless negotiate with Brazil for a favorable coffee price. This is interesting because the small country has no market power against the world as a whole, but it does against one other large country. \bigskip \noindent {\ 6. CONCLUSIONS} POINT 1: Sellers should often be glad, not unhappy, that transaction costs forbid them from engaging in perfect price discrimination. POINT 2: Market power is heavily influenced by the ability to commit. This has been obvious in bargaining models, but it is true in what are usually considered old-fashioned monopoly models. POINT 3: Being small is not the same as being powerless. An atomistic consumer still has market power unless demand is perfectly elastic. He is the only consumer with that particular level of demand---or at least one of a limited number (maybe demand is elastic over an interval). His problem under a monopoly arises because of transaction costs: he is too small to spread a fixed cost. This article is really just a simpler version of a trend in economists' views of industrial organization. The profession has moved away from viewing concentration as the chief enemy of competitive pricing and towards strategic anticompetitive practices. In most models, these practices deter entry or deter price-cutting. 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Tirole, Jean , IO text, p. 136. \footnote{% xxxx Not mentioned yet.} Harberger, Arnold (1954) Monopoly and Resource Allocation (in Factor Markets versus Product Markets) The American Economic Review, Vol. 44, No. 2, Papers and Proceedings of the Sixty-sixth Annual Meeting of the American Economic Association. (May, 1954), pp. 77-87.\footnote{% xxx not included yet.} Tullock, Gordon (1967) ``The Welfare Costs of Tariffs, Monopolies, and Theft'' {\it Western Economic Journal.} June 1967. 5, 3: 224- 32.\footnote{% xxx not included yet.} ``Small Businesses Are Starting To Get Big-Business Discounts,'' By ELEENA DE LISSER THE WALL STREET JOURNAL, January 20, 1998.\footnote{% xxx not included yet.} \bigskip {\bf Cases} United States v. E. I. du Pont de Nemours, 351 U.S. 377 (1956) Neri v. Retail Marine Corp., 285 N.E.2d 311, 314 n.2 (N.Y. 1972) Famous Knitwear Corp. v. Drug Fair, Inc., 493 F.2d 251 (4th Cir. 1974) Snyder v. Herbert Greenbaum \& Assocs., Inc., 38 Md. App. 144, 380 A.2d 618 (Md. Ct. Spec. App. 1977) Islamic Republic of Iran v. Boeing, 771 F.2d 1279 (9th Cir., 1985) \end{document}