Economics 2010 Lecture 13’ Monopoly pricing Monopoly Price discrimination Price discrimination and total revenue Price discrimination and consumer.
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Economics 2010Economics 2010
Lecture 13’
Monopoly pricing
MonopolyMonopoly
Price discriminationPrice discrimination and total
revenuePrice discrimination and consumer
surplusPrice and Output DecisionLimits to Price Discrimination
Price DiscriminationPrice Discrimination
Price discrimination is the practice of charging some customers a higher price than others for an identical good or charging an individual customer a higher price on a small purchase than on a large one
Price DiscriminationPrice Discrimination
Price discrimination is also the practice of charging the same price for goods with different costs (think about your water supply in the valley and on the top of the hills!), but let us keep it simple!
Price DiscriminationPrice Discrimination
Examples of price discrimination Children and students pay a lower price
than other people to see a movie Magazine subscribers pay a lower price
than buyers at a newsagent’s Vacation travelers pay lower air fares than
business travelers
Price DiscriminationPrice Discrimination
Perfect price discrimination occurs when a firm charges a different price for each unit sold and charges each customer the maximum price that he/she is willing to pay for each unit
Price DiscriminationPrice Discrimination
Price differences vs. Price discrimination
Not all price differences are examples of price discrimination
If differences in cost lead to differences in price, there is no price discrimination
Price DiscriminationPrice Discrimination
An example of a price difference that is not price discrimination ...
Ontario Hydro charges big industrial customers a higher price between 7:00 am and 9:00 am than between midnight and 7:00 am. The reason, peak-time power costs more to generate
Price DiscriminationPrice Discrimination
Generosity or self-interest?Why would a firm give a discount to
students and seniors if it is trying to maximize profit?
Wouldn’t it make a bigger profit by charging all its customers the “full price”?
Price DiscriminationPrice Discrimination
It turns out that price discrimination is profitable
To see why, we first look at the connection between price discrimination and total revenue
Price Discrimination and Price Discrimination and Total RevenueTotal Revenue
For a single price monopoly, total revenue equals price multiplied by the quantity sold
Price Discrimination and Price Discrimination and Total RevenueTotal Revenue
For example, Bobbie sells 3 haircuts an hour for $14 each and her total revenue is $42 an hour.
3 x $14 = $42
Price Discrimination and Price Discrimination and Total RevenueTotal Revenue
But suppose Bobbie can sell 2 haircuts an hour for $16 and 1 haircut an hour for $14
16
Price Discrimination and Price Discrimination and Total RevenueTotal Revenue
Her total revenue now increases
16
2 x $16 + $14 = $46
She receives $32 for the first two haircuts plus $14 for the third
Price Discrimination and Price Discrimination and Total RevenueTotal Revenue
Now suppose she can sell 1 haircut an hour for $18, one for $16, and one for $14
16
18
Price Discrimination and Price Discrimination and Total RevenueTotal Revenue
Her total revenue increases again
16
18
$18 + $16 + $14
= $48
It is now $18 + $16 + $14 = $48.
Price Discrimination and Price Discrimination and Total RevenueTotal Revenue
The greater the degree of price discrimination, the greater is the total revenue
Price Discrimination and Price Discrimination and Consumer SurplusConsumer Surplus
Price discrimination captures consumer surplus and converts it into economic profit
This idea is the essence of successful marketing
The greater the degree of price discrimination, the smaller is consumer surplus
Price and Output DecisionPrice and Output DecisionThe single
price case: a base
Bobby maximizes profit by selling 3 haircuts an hour
Price and Output DecisionPrice and Output Decision
The price per haircut is $14 and Bobby’s economic profit is $12 an hour
Price and Output DecisionPrice and Output Decision
Now suppose she raises her price to $16 and offers a special for students of only $14
16
Price and Output DecisionPrice and Output Decision
She now sells 2 haircuts an hour at $16 and 1 at $14
16
Price and Output DecisionPrice and Output Decision
Here ATC of producing 3 haircuts an hour is unchanged at $10 a haircut
But she now gets more revenue
16
Price and Output DecisionPrice and Output Decision
Her economic profit increases by $4 an hour to $16 an hour
16
Economic Profit $16.
Price and Output DecisionPrice and Output Decision
Now suppose Bobby raises her price to $18 and offers a special for seniors of $16 and for students of $14
16
Economic Profit $16.
16
18
Price and Output DecisionPrice and Output Decision
She sells 1 haircut an hour for $18, 1 for $16 and 1 for $14
Economic Profit $16.
16
18
Price and Output DecisionPrice and Output Decision
Again, her ATC of producing 3 haircuts an hour is $10 per haircut
Economic Profit $16.
16
18
Price and Output DecisionPrice and Output Decision
So her economic profit increases yet further
It now becomes $18 an hour
Economic Profit $16.Economic Profit $18.
16
18
Price and Output DecisionPrice and Output Decision
Bobby is now making an economic profit that is 50% higher than with a single price of $14
Economic Profit $16.
16
18
Economic Profit $18.
Price and Output DecisionPrice and Output Decision
She now gets very clever
She notices that her marginal cost of producing a 4th haircut per hour is only $12
Economic Profit $16.
16
18
Economic Profit $18.
12
Price and Output DecisionPrice and Output Decision
Economic Profit $16.
16
18
Economic Profit $18.
12
This cost is less than her lowest price of $14
She also notices that her ATC of 4 haircuts is still only $10
Price and Output DecisionPrice and Output Decision
Economic Profit $16.
16
18
Economic Profit $18.
12
So she decides to offer yet another special--boys haircuts for $12
Price and Output DecisionPrice and Output Decision
Economic Profit $16.
16
18
Economic Profit $18.
12
She now sells 1 haircut an hour for $18, 1 for $16, 1 for $14, and 1 for $12
Price and Output DecisionPrice and Output Decision
Economic Profit $16.
16
18
Economic Profit $18.
12
Her economic profit now increases by a further $2 an hour Economic
Profit $20.
She is now making an economic profit of $20 an hour
Price and Output DecisionPrice and Output DecisionAn example. Air Canada’s
economy class round trip fares between Toronto and London last summer were: No restrictions $1,645 7 day advance purchase $1,008 14 day advance purchase $958 21 day advance purchase $898
Limits to Price Limits to Price DiscriminationDiscrimination
No resale must be possibleMust be possible to identify groups with
different price-elasticities of demand
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Comparing Monopoly and Competition
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