© 2005 Pearson Education Canada Inc. 14.1 Chapter 14 Price Discrimination and Monopoly Practices.

© 2005 Pearson Education Canada Inc.14.1

Chapter 14Chapter 14

Price Discrimination and Price Discrimination and Monopoly Practices Monopoly Practices


Figure 14.1 The simple monopoly problemFigure 14.1 The simple monopoly problem


Price Discrimination and Price Discrimination and Market SegmentationMarket Segmentation

All price discrimination schemes All price discrimination schemes share an underlying strategy to share an underlying strategy to segment the market and to charge segment the market and to charge each segment a different price each segment a different price relative to its cost.relative to its cost.

The monopolist’s goal is to turn The monopolist’s goal is to turn consumer surplus into revenue.consumer surplus into revenue.


Price DiscriminationPrice DiscriminationCategories of price discriminationCategories of price discrimination::

1.1. Perfect Price discriminationPerfect Price discrimination-successfully extracting -successfully extracting the maximum possible profit from each customer the maximum possible profit from each customer and therefore the whole market.and therefore the whole market.

2.2. Ordinary Price Discrimination-Ordinary Price Discrimination- identification of identification of potential customer groups, charging each group a potential customer groups, charging each group a separate price.separate price.

3.3. Multipart PricingMultipart Pricing-charging different rates for different -charging different rates for different amounts (blocks) of a good or service.amounts (blocks) of a good or service.


Figure 14.2 The perfect price-Figure 14.2 The perfect price-discriminating monopolistdiscriminating monopolist


Price DiscriminationPrice Discrimination

To maximize revenue from the sale To maximize revenue from the sale of a fixed quantity of output, allocate of a fixed quantity of output, allocate output so that marginal revenue is output so that marginal revenue is identical in all markets.identical in all markets.


Figure 14.3 Price discrimination: Figure 14.3 Price discrimination: equality of marginal revenueequality of marginal revenue



A profit maximizing monopolist engaging A profit maximizing monopolist engaging in ordinary price discrimination will in ordinary price discrimination will choose an aggregate output where choose an aggregate output where (aggregate)MR=MC.(aggregate)MR=MC.

Output is allocated so MR is the same in Output is allocated so MR is the same in all market segments. all market segments.

Price is higher in the market segment Price is higher in the market segment with the lower price elasticity of demand.with the lower price elasticity of demand.


Figure 14.4 Price discrimination: Figure 14.4 Price discrimination: profit maximizationprofit maximization



Criteria For Price Discrimination:Criteria For Price Discrimination:

1.1. The market must be able to identify The market must be able to identify different price elasticities of different price elasticities of demand and segment the market demand and segment the market accordingly.accordingly.

2.2. Re-sale must not be possible or cost Re-sale must not be possible or cost effective in order to prevent effective in order to prevent arbitrage (profitable re-selling). arbitrage (profitable re-selling).


Price DiscriminationPrice Discrimination Methods of market segmentation:Methods of market segmentation:

- Direct identification (seniors must - Direct identification (seniors must show ID to get discounts).show ID to get discounts).

-- Self selection (advance booking on Self selection (advance booking on airlines, airlines, stay a Saturday night).stay a Saturday night).

-- Intertemporal-charging higher Intertemporal-charging higher prices prices when the good is first when the good is first introduced and introduced and reducing prices reducing prices through time. through time.


Figure 14.6 Multipart pricingFigure 14.6 Multipart pricing


Figure 14.7 Discriminatory hiring to minimize costsFigure 14.7 Discriminatory hiring to minimize costs


Monopsonistic Price DiscriminationMonopsonistic Price Discrimination

A profit maximizing monopsonist will A profit maximizing monopsonist will choose aggregate quantity of inputs choose aggregate quantity of inputs so that aggregate marginal factor so that aggregate marginal factor cost (MFC) equals marginal revenue cost (MFC) equals marginal revenue product (MRP).product (MRP).

Purchases will be allocated so that Purchases will be allocated so that MFC is identical in all input markets.MFC is identical in all input markets.


Figure 14.8 Discriminatory Figure 14.8 Discriminatory hiring to maximize profithiring to maximize profit


Figure 14.9 Two-part tariff pricingFigure 14.9 Two-part tariff pricing


Tie-In SalesTie-In Sales

Tie-in sales are another way for a monopolist to Tie-in sales are another way for a monopolist to extract surplus from its customers.extract surplus from its customers.

A tie-in sale occurs when a firm has monopoly A tie-in sale occurs when a firm has monopoly over some good X, but refuses to sell it unless over some good X, but refuses to sell it unless you also buy good Y, which is available in a you also buy good Y, which is available in a competitive market.competitive market.

With a tie-in sale, the firm lowers the price of a With a tie-in sale, the firm lowers the price of a monopoly good and raises the price of the tied monopoly good and raises the price of the tied goodgood


Figure14.10 Tie-in salesFigure14.10 Tie-in sales


All-or-Nothing Demands and the All-or-Nothing Demands and the Exploitation EffectExploitation Effect

An ordinary demand curve shows the An ordinary demand curve shows the marginal value of a given quantity.marginal value of a given quantity.

An all-or-nothing demand curve An all-or-nothing demand curve shows the average value of a given shows the average value of a given quantity.quantity.

When a consumer pays the average When a consumer pays the average value for a good, rather than the value for a good, rather than the marginal value, then the consumer marginal value, then the consumer surplus is zero.surplus is zero.


Figure 14.11 All-or-nothing demand curveFigure 14.11 All-or-nothing demand curve


Figure 14.12 The exploitation of affectionFigure 14.12 The exploitation of affection

© 2005 Pearson Education Canada Inc. 14.1 Chapter 14 Price Discrimination and Monopoly Practices.

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