Price discrimination

1
Price discrimination

• A producer is able to charge consumers, who have
  different tastes and preferences, different
  prices for the same good

2
Price discrimination

• Conditions or
• Assumptions
• When producers have market power
• and
• They sell a good that cannot be resold

3
Always assume the short-run and profit-maximizing
output, unless directed otherwise

• A perfectly competitive firm would produce the
  output at which price is equal to
• A) Average cost
• B) Marginal cost
• C) Marginal revenue
• D) Average revenue

4
Always assume the short-run and profit-maximizing
output, unless directed otherwise

• A perfectly competitive firm would produce the
  output at which price is equal to
• A) Average cost
• B) Marginal cost
• C) Marginal revenue
• D) Average revenue

5

• A monopolist would produce the output at which
  marginal cost is equal to
• A) Average cost
• B) Price
• C) Marginal revenue
• D) Average revenue

6

• A monopolist would produce the output at which
  marginal cost is equal to
• A) Average cost
• B) Price
• C) Marginal revenue
• D) Average revenue

7
Using the table you created

• Prove that consumer surplus (calculated in whole
  dollar increments) at a price of 17 is a total
  of 6.
• (hint) the first consumer, willing to pay 20,
  has a surplus of 3
• this method uses addition of incremental whole
  dollar amounts rather than the geometric formula
  for a triangle ((21-17)4)/2

8





















20
Whole dollar amounts of individual consumer
surplus at a market price of 17 3216 or
2x36
3
2
1
17
14
10
AR, (D)
0
11
4
9
Using the table you created

• At a price of 17 consumer surplus (calculated
  in whole dollar increments) is a total of 6.
• (hint) the first consumer, willing to pay 20,
  has a surplus of 3
• The triangle area formula works if you use the
  first price (20) for the first whole unit (1)
• ((20-17)x4)/2 (3x4)/2 6
  or
• (20-17)(19-17)(18-17) 6
• 3 2 1 6
• 3 x 2 6

10
Assume the average costs and marginal costs are
constant and equal to 14.

• If Pat chose to produce the perfectly competitive
  output and charge the perfectly competitive
  price she will charge, supply, and generate
  whole dollar consumer surplus in the following
  amounts
• price output consumer surplus
• 17 4 6
• 14 7 49
• 14 7 21
• 11 10 110

11





















20
Whole dollar amounts of individual consumer
surplus at a market price of 14 (654321)
21 or 3½ x621
6
17
5
4
3
2
The competitive firm would produce output, where
PMC (PMR) because MR is equal to Demand for
the competitive firm
AC, MC, MR, AR Firm DEMAND
1
14
10
AR, (D) industry
0
11
4
7
12
Assume the average costs and marginal costs are
constant and equal to 14.

• If Pat chose to produce the perfectly competitive
  output and charge the perfectly competitive
  price she will charge, supply, and generate
  consumer surplus in the following amounts
• price output consumer surplus
• 17 4 6
• 14 7 49
• 14 7 21
• 11 10 110

13
Assume the average costs and marginal costs are
constant and equal to 14.

• If Pat chose to produce the monopoly output and
  charge the monopoly single price she will
  charge, supply, and generate whole dollar
  consumer surplus in the following amounts
• price output consumer surplus
• 17 4 6
• 14 7 49
• 14 7 21
• 11 10 110

14
P
The monopolistic firm would produce output, where
MRMC (PgtMR) because MR lies below demand





















20
17
The competitive firm would produce output, where
PMC (PMR) because MR is equal to D
AC, MC
14
10
price AR, (D)
MR
Q
0
11
4
7
15
P
The monopolistic firm would produce output, where
MRMC (PgtMR) because MR lies below demand





















20
1
17
The competitive firm would produce output, where
PMC (PMR) because MR is equal to D
AC, MC
14
10
price AR, (D)
MR
Q
0
11
4
7
16
Assume the average costs and marginal costs are
constant and equal to 14.

• If Pat chose to produce the monopoly output and
  charge the monopoly single price she will
  charge, supply, and generate whole dollar
  consumer surplus in the following amounts
• price output consumer surplus
• 17 4 6
• 14 7 49
• 14 7 21
• 11 10 110

17
Assume the average costs and marginal costs are
constant and equal to 14. Further assume that
Pat knows the different tastes and preferences of
all consumers and the conditions that allow price
discrimination apply

• How many tattoos will Pat supply?
• At what price will she charge for the tattoos?
• A) 20, B)19, C)18, D)17, E)16, F)15, G)14
• What consumer surplus will be generated?

18





















20
The price discriminating monopolistic firm can
capture all whole dollar consumer surplus as
profit, by charging each consumer what he is
willing and able to pay for the same
good (654321) 21 or 3½ x621
6
17
5
4
3
2
1
AC, MC
14
10
AR, (D)
MR
0
11
4
7
19
Assume the average costs and marginal costs are
constant and equal to 14. Further assume that
Pat knows the different tastes and preferences of
all consumers and the conditions that allow price
discrimination apply

• How many tattoos will Pat supply?
• 7
• At what price will she charge for the tattoos?
• A) 20, B)19, C)18, D)17, E)16, F)15, G)14
• What consumer surplus will be generated?
• 0

20
Assume the average costs and marginal costs are
constant and equal to 14 for all firms, and the
conditions that allow price discrimination apply

• Describe the profit situation for the perfect
  competitor, the discriminating monopoly, and the
  non-discriminating monopoly.

21
Assume the average costs and marginal costs are
constant and equal to 14 for all firms, and the
conditions that allow price discrimination apply

• Describe the profit situation for the perfect
  competitor, the discriminating monopoly, and the
  non-discriminating monopoly.
• The profits for the discriminating monopoly will
  be highest, the perfect competitor will be
  lowest, and the non-discriminating monopoly will
  lie in between

22





















20
The price discriminating monopolistic firm can
capture all whole dollar consumer surplus as
profit, by charging each consumer what he is
willing and able to pay for the same
good (6x7)/2 21 (654321) 21 or 3½
x621
6
5
17
Non-discriminating monopoly profit 3 x4 12
2
1
AC, MC
14
10
AR, (D)
MR
0
11
4
7
23
The effects of price discrimination-some typical
free response questions

• What happens to consumer surplus if a firm
  successfully price discriminates?
• What happens to a firms profits if it
  successfully price discriminates?
• What happens to the quantity supplied by a
  successful price discriminating firm compared
  with a non-price discriminating firm?
• How does the quantity supplied by a successful
  price discriminating firm compare with quantity
  supplied by firms in a perfectly competitive
  industry?
• How does price discrimination affect economic
  efficiency?

24
What happens to consumer surplus if a firm
successfully price discriminates?
25
What happens to consumer surplus if a firm
successfully price discriminates?

• If a firm successfully price discriminates,
  consumer surplus decreases

26
What happens to a firms profits if it
successfully price discriminates?
27
What happens to a firms profits if it
successfully price discriminates?

• If a firm successfully price discriminates, its
  profits increase

28
What happens to the quantity supplied by a
successful price discriminating firm compared
with a non-price discriminating firm?
29
What happens to the quantity supplied by a
successful price discriminating firm compared
with a non-price discriminating firm?

• the quantity supplied by a successful price
  discriminating firm is greater than a non-price
  discriminating firm

30
How does the quantity supplied by a successful
price discriminating firm compare with quantity
supplied by firms in a perfectly competitive
industry?
31
How does the quantity supplied by a successful
price discriminating firm compare with quantity
supplied by firms in a perfectly competitive
industry?

• the quantity supplied by a successful price
  discriminating firm is the same as the quantity
  supplied by firms in a perfectly competitive
  industry

32
How does price discrimination affect economic
efficiency?
33
How does price discrimination affect economic
efficiency?

• price discrimination improves economic efficiency
• because output is increased and price is closer
  to marginal cost

34
What are some real examples of price
discrimination?
35
What are some real examples of price
discrimination?

• Charging different airline passengers different
  prices for the same ticket
• Providing discounts on cars by negotiating with
  each customer on an individual basis
• Providing college scholarships for low-income
  students but not wealthier ones
• Corporate or business discounts but not personal
  or household
• Senior citizen discounts

36
What factors make price discrimination easier?
37
What factors make price discrimination easier?

• An inelastic demand curve
• The product cannot be resold easily
• Categories of customers can be separated in the
  market

38
Is price discrimination good or bad?
39
Is price discrimination good or bad?

• On the negative side,
• it decreases consumer surplus while it increases
  a firms profits
• On the positive side,
• It increases output
• More consumers will now buy the product
• It results in a more efficient output,
• allocation of resources