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Monopoly & Price Discrimination. Hall & Lieberman, Chapter 9. Price Discrimination. Single-price monopoly Firm that is limited to changing same price for each unit of output sold

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Monopoly price discrimination l.jpg

Monopoly & Price Discrimination

Hall & Lieberman, Chapter 9


Price discrimination l.jpg
Price Discrimination

  • Single-price monopoly

    • Firm that is limited to changing same price for each unit of output sold

  • Price discrimination occurs when a firm charges different prices to different customers for reasons other than differences in costs

  • Price-discriminating monopoly does not discriminate based on prejudice, stereotypes, or ill-will toward any person or group

    • Rather, it divides its customers into different categories based on their willingness to pay for good


Requirements for price discrimination l.jpg
Requirements for Price Discrimination

  • Although every firm would like to practice price discrimination, not all of them can

  • To successfully price discriminate, three conditions must be satisfied

    • Must be a downward-sloping demand curve for the firm’s output

    • Firm must be able to identify consumers willing to pay more

    • Firm must be able to prevent low-price customers from reselling to high-price customers


Price discrimination that harms consumers l.jpg
Price Discrimination That Harms Consumers

  • Price discrimination always benefits owners of a firm

    • Can use this ability to increase its profit

  • When price discrimination raises price for some consumer above price they would pay under a single-price policy it harms consumers

    • Additional profit for the firm is equal to monetary loss of consumers


Figure 8a price discrimination l.jpg

(a)

Dollars per Ticket

Number of Round-trip Tickets

Figure 8a: Price Discrimination

MC

E

ATC

$120

80

MR

D

30


Figure 8b price discrimination l.jpg

Additional profit from price discrimination

Figure 8b: Price Discrimination

(b)

Dollars per Ticket

MC

$160

120

MR

D

Number of Round-trip Tickets

10

30


Figure 8c price discrimination l.jpg

Additional profit from price discrimination

Figure 8c: Price Discrimination

(c)

Dollars per Ticket

MC

$120

F

G

100

H

MR

D

Number of Round-trip Tickets

30

30


Price discrimination that benefits consumers l.jpg
Price Discrimination That Benefits Consumers

  • Price discrimination benefits monopoly at the same time it benefits a group of consumers

  • Since no one’s price is raised, no one is harmed by this policy

    • When price discrimination lowers price for some consumers below what they would pay under a single-price policy, it benefits consumers as well as firm


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Perfect Price Discrimination

  • Suppose a firm could somehow find out maximum price customers would be willing to pay for each unit of output it sells

  • It could increase profits even further by practicing perfect price discrimination

    • Firm charges each customer the most the customer would be willing to pay for each unit he or she buys

    • Increases profit at expense of consumers

  • Perfect price discrimination is very difficult to practice in the real world

    • Would require firm to read its customers’ minds

  • Marginal revenue is equal to price of additional unit sold

    • Firm’s MR curve is same as its demand curve


Figure 9 perfect price discrimination l.jpg

H

Dollars per Doll

MR curve before price discrimination

$30

E

25

B

J

10

MC = ATC

D

MR

Number of Dolls per Day

20

30

60

Figure 9: Perfect Price Discrimination


The decline of monopoly l.jpg
The Decline of Monopoly?

  • Past century was not kind to monopolies

  • Today, monopolies face a different threat

    • Relentless advance of technology

  • The world of monopolies is changing rapidly

    • But monopolies in many forms will be with us for some time


Using the theory price discrimination at colleges and universities l.jpg
Using the Theory: Price Discrimination at Colleges and Universities

  • Most colleges and universities give some kind of financial aid to a large proportion of their students

  • Financial aid has been used as an effective method of price discrimination

    • Designed to increase revenue of the college

  • Colleges have long been in an especially good position to benefit from price discrimination, because they satisfy all three requirements

    • Face downward-sloping demand curves

    • Able to identify consumers willing to pay more

    • Able to prevent low-price customers from reselling to high-price customers


Using the theory price discrimination at colleges and universities13 l.jpg
Using the Theory: Price Discrimination at Colleges and Universities

  • Most colleges have been active price discriminators for decades

  • Under newer systems, those who can signal a lower willingness to pay have benefited from reduced prices

    • While those signaling greater willingness to pay have suffered a price increase

  • Result is vastly different prices for different students

    • Highly correlated to their families’ willingness to pay

  • Increased price discrimination at colleges, like so many other economic issues, is a matter of tradeoffs


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