Chapter 9: Monopoly

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Chapter 9 Monopoly

• Price Discrimination

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Price Discrimination

• Price discrimination refers to any complicated
  price strategy that tries to extract consumer
  surplus and deadweight loss, so as to increase
  profits, relative to the benchmark case of
  uniform pricing
• First degree price discrimination, a.k.a.,
  perfect price discrimination
• Second degree price discrimination consumers are
  given a menu of packages to choose from
• Third degree price discrimination customers have
  identifiable difference, and resale between
  customers is (naturally or made) difficult

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First degree price discrimination

• For instance, each student wants to buy one unit
  of notebook computer but has a different maximum
  willingness to pay
• Under first degree price discrimination, every
  customer is charged his/her maximum willingness
  to pay
• In case of heterogeneous customers, this is quite
  unlikely and represents an ideal case.

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First degree price discrimination

• In case of homogenous customers, this brings us
  to the idea of membership fees.
• Suppose each HKU faculty members monthly demand
  for meals in its common room is the same, denoted
  by P 500 80Q
• Suppose the marginal cost of each meal is 20.

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Membership fee
P
Under uniform pricing MRMCgtQ3,
P260 Perfect price discrimination gtmembership
fee ABC Each meals price 20
500
A
260
B
C
Socially optimal output
20
Q
3
6
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Second degree price discrimination

• Give a menu of price packages and let the
  customers choose which one to accept
• High fixed fee low per unit fee
• Low fixed fee high per unit fee
• High usage customers choose the former low usage
  customers choose the latter.

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Third Degree Price Discrimination

• Arcadia Publisher is planning to publish a book.
• loyalty to the author is fixed at 2M
• production cost0 per copy
• two groups of buyers
• 100K group 1 readers--each willing to pay up to
  30
• 400K group 2 readers--each willing to pay up to
  5
• If p 30, only group 1 readers will buy the
  book. Arcadia obtains 30x100K 3M (gross of
  loyalty)
• If p 5, both groups of readers will buy the
  book. Arcadia obtains 5x500K2.5M (gross of
  loyalty)
• Hence, charging 30 is better.

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Price Discrimination

• Now suppose Arcadia knows that all group 1
  readers are in HK and group 2 readers are in
  Chile. Then it can charges a fee of 30 for a
  book sold in HK and 5 for a book sold in Chile.
• Price discrimination leads to
• greater profits
• greater social welfare!!

9
Determination of differentiated prices under
constant marginal cost
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Evidence of Geographic Price Discrimination

• Parallel imports--unauthorized flows of genuine
  products across countries that compete with
  authorized distribution channels (ranging from
  deluxe cars to cheap beer)
• It is often thought that parallel imports of HK
  made movie and music products back into HK market
  adversely affects the very survival of HK movie
  and music industry.

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Price Discrimination How to separate different
customers

• Coupons (i.e., hurdle)--those people who have
  lower time cost will collect and use coupons to
  get a discount they are likely to have lower
  maximum willingness to pay as well
• In 1999, CTI charged different fees for its
  registered IDD users--37cents/min to US for smart
  users who made a double registration 2.9 /min
  for not-so-smart users who did not (c.w. HKTCs
  001 and 0060).
• Educational edition--software companies charge a
  substantial lower price to teachers and students
  for their software

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Price Discrimination How to separate different
customers

• Hardcover vs paperback--readers of lower maximum
  willingness to pay are more patient hence
  publishing a paperback later attract these buyers
  without affecting sale to hardcover buyers
  (compared w. seasonal sales in department
  stores)--production differentiation in general
• Different prices for different geographic
  locations
• golf clubs are much more expensive in HK than in
  the US (HK4.5K vs US250)
• tennis ball--HKs price is two or three times
  that in the US