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Price Discrimination Ho

The document discusses various pricing strategies available to monopolists, including uniform pricing and different forms of non-uniform pricing such as price discrimination. Perfect price discrimination allows monopolists to charge each customer the highest price they are willing to pay, while other strategies like quantity discrimination, multimarket discrimination, two-part tariffs, and tie-in sales allow charging different prices to extract more consumer surplus. These strategies are most effective when resale is prevented and customers have varying price elasticities that can be identified.

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69 views18 pages

Price Discrimination Ho

The document discusses various pricing strategies available to monopolists, including uniform pricing and different forms of non-uniform pricing such as price discrimination. Perfect price discrimination allows monopolists to charge each customer the highest price they are willing to pay, while other strategies like quantity discrimination, multimarket discrimination, two-part tariffs, and tie-in sales allow charging different prices to extract more consumer surplus. These strategies are most effective when resale is prevented and customers have varying price elasticities that can be identified.

Uploaded by

archana_motagi
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Monopoly Behavior

or
Price Discrimination
Chapter 25

monoply.gif (GIF Image, 289x289 pixels) http://i4.photobucket.com/albums/y144/AlwaysWondering1/monoply.gif?...


Monopoly Pricing

Uniform pricing: charging the same price to every customer


Competitive firms are price takers, suffer losses if they don’t
charge the one, uniform market price
We’ve been thinking about the behavior of a monopolist
charging a uniform price
But, a monopolist is a price maker, free to set price, including
non-uniformly
Today: non-uniform pricing, especially price discrimination
Price discrimination: different prices for different people
Other non-uniform pricing schemes: two-part tariffs, bundling,
tie-ins
Non-uniform Pricing

Price-discrimination earns a monopoly higher profits

Non-discriminating firm faces tradeoff:


Charge high price for customers with high WTP
Charge low price and sell more units to more customers
Optimum typically involves compromise

Price-discriminating firm avoids this tradeoff:


Charges higher price to those with high WTP capturing their
consumer surplus
Charges lower price to those with less WTP generating extra
sales
Example

Movie theater, MC = 0: everyone fits, showing movie is


costless, so π = revenue

Potential audience: 10 college students WTP $10, 20 senior


citizens WTP $5

Uniform price = $5 =⇒ π = 5 · 10 + 5 · 20 = 50 + 100 = 150

Uniform price = $10 =⇒ π = 10 · 10 + 10 · 0 = 100 = 100

Price discriminate =⇒ π = 10 · 10 + 5 · 20 = 100 + 100 = 200


Non-uniform Pricing

Intuition: why non-uniform pricing works in general

Firm faces a profit-maximization problem

Uniform prices is one tool to solve the problem

Non-uniform pricing allows other, multiple tools

This can only help solve the problem, at worst the extra tools
are useless and you can choose not to use them
Conditions for Price Discrimination

Firm has market power

Consumers have different demand elasticities, firm can


identify them

Firm can prevent/limit resales from low-paying to high-paying


customers
Resales difficult for services, when transaction costs are high
E.g. show student ID when buying student software, mail in
class schedule
Three Types of Price Discrimination

Perfect price discrimination (first-degree): sell each unit for


consumer’s full reservation price; prices differ across buyers

Quantity discrimination (second-degree): different price for


larger quantities (bulk discounts); prices same for all buyers

Multimarket price discrimination (third-degree): prices


same within group, but different groups/markets are charged
different prices
Perfect Price Discrimination

All-knowing monopoly sells each unit at reservation price,


height of demand curve
Monopolist reaps all possible gains-from-trade, leaves buyers
with zero surplus
However, monopolist supplies efficient level of output,
outcome is Pareto efficient

$/output unit

PS MC(y)

p(y)
yc y
Quantity Discrimination

Hard to determine individual reservation prices

But easy to know that most customers are willing to pay more
for first unit than second (demand slopes down)

Firm varies prices with number of units purchased

E.g. utility block pricing, bulk discounts


Multimarket Price Discrimination

Firm only knows which group/market is likely to have higher


reservation prices

Different prices for different groups

E.g. theater example, airline classes, software pricing, coupons


Multimarket Price Discrimination

How does the monopolist maximize profits across markets?


Choosing price for each market ⇐⇒ choosing quantity for
each market
π(y1 , y2 ) = p1 (y1 )y1 + p2 (y2 )y2 − c(y1 + y2 )
Profit maximizing condition:

MR1 (y1 ) = MR2 (y2 ) = MC (y1 + y2 )

Equate MR across markets to MC


If one market generated more marginal revenue than the other,
could increase profits be shifting production to that market
MR1 (y1 ) = MR2 (y2 ) = MC (y1 + y2 )

Demand differs across markets, so price will be different

Where is price higher?


In the market with a higher markup
1
Markup = 1+ 1

I.e. in market with less elastic demand


Multimarket Price Discrimination

MR1 (y1 ) = MR2 (y2 ) = MC (y1 + y2 )

Market 1 Market 2

p1(y1)
p2(y2)
p1(y1*)
p2(y2*)

MC MC

y1* y1 y2* y2
MR1(y1) MR2(y2)
Multimarket Price Discrimination

Example: workout 25.5


Multimarket Price Discrimination

Welfare effects:

Inefficient production & consumption

Lower welfare than under PC or perfect price discrimination

Welfare may be higher or lower than in single-price monopoly


Other Kinds of Non-uniform Pricing

Two-part tariffs: lump-sum fee + constant price per unit

Tie-in sales: can buy one product only if you buy another one
as well

Requirement tie-in
Bundling (or package tie-in)

Can think of these as a form of quantity (2nd degree)


discrimination, where the average price per unit varies with
the number of units purchased
Two-part Tariffs

Lump-sum fee + per unit price


E.g. telephone service (connection fee + per minute rate);
club cover charges; NFL personal seat license
Because of fixed fee, average price per unit is higher the fewer
units you buy
Uniform pricing: raise p above MC =⇒ earn more per unit,
but lower CS
Two-part tariff (ideal): capture each customer’s max potential
CS by charging different lump-sum fees, then set p = MC
Like with first degree PD, there is no inefficiency
But monopolist reaps all gains-from-trade, so equity suffers
Tie-in Sales

Requirement tie-in:
E.g. Printer + ink/toner cartridges, razors + blades
Helps firm identify heavy users, i.e. those with high WTP

Bundling:
E.g. Software such as Microsoft Windows + Internet Explorer,
internet & cable service, preseason & regular season tickets,
service + parts
Allows firms that can’t price discriminate to charge different
people different prices
Profitability depends on tastes (negatively correlated demand
for the two goods) and the ability to prevent resale

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