Notes on Monopoly – Price Discrimination

Notes from Prof. Frost lecture, Krugman/Wells Economics Book.  The final is ever closer approaching... at least i'm getting better at drawing graph's (I'm using paint.net).

Monopoly – Price Discrimination 

A single-price monopolist offers its product to tall consumers at the same price 

                 --> Many if not most monopolists can increase their profits by charging different customers
                      different prices for the same good, by engaging in price discrimination.  

The Logic of Price Discrimination

different groups of consumers differ in their sensitivity to price

                ex.–> A higher price for an airline ticket has a larger effect in discouraging purchases by students than by business travelers. 

As long as different groups of customers respond differently to the price, a monopolist will find that it can capture more consumer surplus and increase its profits by charging different prices 

In this examples we have two types of customers–> business, willing to pay $550 per ticket; and students willing to pay $150. There are 2000 of each kind of customer. The firm has a constant marginal cost of $150 per seat. If the firm can charge different prices it would capture all of the consumer surplus as profit. 

Perfect Price Discrimination 

Perfect price discrimination takes place when a monopolist charges each consumer his or her willingness to pay–the maximum that consumer is willing to pay.  

The entire surplus is captured by the monopolist in the form of profit.

A firm that can engage in perfect price discrimination doesn’t cause any inefficiency because the source of inefficiency is eliminated

              –> there are no potential consumers who would be willing to purchase the good at a price equal to or above marginal cost because the

                  monopolist "scoops" them up by offering a lower price than it charges others.

Perfect price discrimination is not possible in practice because of a problem of prices as economic signals

              –> the prices should convey the information needed to ensure that all mutually beneficial transactions will indeed occur,

               –> But prices are often not perfect signals–a consumers true willingness to pay can be disguised....

                   Monopolists try different pricing strategies to move towards perfect price discrimination

 
Advance purchase restrictions –prices are lower for those who purchase in advance, which separates those who are likely to shop for better prices from those who won’t

 

Volume discounts –price lowers if you buy more, when consumers plan to consumer a lot, the cost of the last unit–the marginal cost to the consumer–is less than the average price. This separates those who plan to buy a lot and are more sensitive to price

 

Two-part tariffs –> discount clubs like Sam’s/B.J’s charge an annual fee in addition to cost of items you buy, making the cost of the first item you buy much higher than subsequent items making the two-part tariff behave like a volume discount.

The greater the number of different prices a monopolist is able to charge, the closer it can get to perfect price discrimination because it is able to capture more of the consumer surplus and increase its profit.

 

 

 

Posted via web from Jim Nichols