Price Discrimination: Charging different prices to different customers

1
Price Discrimination Charging different prices
to different customers
2
Can the monopolist do better than charge a single
price?
Profit
PM
?/Q
ATC
MC ATC
Demand
QM
MR
3
Can the monopolist do better?
Can the monopolist extract consumer surplus?
Profit
PM
Can the monopolist expand output profitably
beyond the single price monopolist level?
?/Q
ATC
MC ATC
Demand
MR
QM
4
Perfect price discrimination the monopolist
charges each customer their reservation price
Profit gap between reservation price and ATC
PM
Monopolist will produce at the efficient level
ATC
MC ATC
Demand
QM
QPD
MR
5
Requirements for Price Discrimination

• Information requirement Firm must be able to
  identify consumer reservation price
• Firm must be able to prevent low-reservation
  price customers from reselling to high-price
  customers
• NOTE As long as Price charged exceeds marginal
  cost of producing, the firm makes profit from the
  sale.

6
Example of near perfect price discrimination
The University

• Charge high sticker price
• Get customers to provide information on their
  reservation price
• Ability (ACT, school rank, school reputation)
• More ability, more options, lower reservation
  pricegive merit scholarships
• Financial need (FAFSA form required to get
  financial aid)
• Poorer implies lower reservation pricegive need
  based scholarships
• Desired major, interest in other schools,
  residency, relatives in school, ..

7
Example of near perfect price discrimination
The University

• Admission and financial aid are not transferable
  No resale

8
Example Airline tickets
9
Most monopolists cannot perfectly price
discriminate

• Discriminate by customer groups
• Regional markets
• Consumer groups (senior discounts, volume users)
• Countries (international trade)
• Time of sale (on- vs. off-season early bird
  specials day vs. night use, weekend vs. weekday)

10
Can the monopolist do better than charge a single
price?
Charge P1 for group 1 Charge P2 for group 2
Charge P3 for group 3
P1
P2
Additional ?
P3
MC ATC
Demand
QM
MR
11
Example Ticketmaster moves into secondary ticket
market (scalping)
12

• Price discrimination increases monopolist profits
• Raises output closer to the perfectly competitive
  level---improves economic efficiency