Price discriminating monopolist

Bellringer quiz1. Which market structure is the best for consumers?

2. Which market structure is best for producers?3. Which market structure is shown in these graphs?

4. What would you advise this firm to do?

How could the firm make even MORE PROFIT?

• Remember MR < Price and they are the ONLY FIRM!

Market sale simulation

• 6 volunteers

Price Discrimination

• Discrimination: treating people differently based on some characteristic, e.g. race or gender.

• Price discrimination: selling the same good at different prices to different buyers.

• Examples (3 min)

• The characteristic used in price discrimination is willingness to pay (WTP): – A firm can increase profit by charging a higher price to

buyers with higher WTP.

• Santa Barbara, CA

• Argentina

Seinfeld clip

• Economic market?

Consumer surplus

Deadweight

loss

Monopoly profit

Perfect Price Discrimination vs. Single Price Monopoly

Here, the monopolist charges the same price (PM) to all buyers. A deadweight loss results.

MC

Quantity

Price

D

MR

PM

QM

9

Monopoly profit

Perfect Price Discrimination vs. Single Price Monopoly

Here, the monopolist produces the competitive quantity, but charges each buyer his or her WTP. This is called perfect price discrimination.The monopolist captures all CS as profit.But there’s no DWL. “Price discriminating monopolist”

MC

Quantity

Price

D

MR

Q

10

Price Discrimination in the Real World

• In the real world, perfect price discrimination is not possible: – No firm knows every buyer’s WTP– Buyers do not announce it to sellers

• So, firms divide customers into groups based on some observable trait that is likely related to WTP, such as age.

• BUT IN 2013, THINGS HAVE CHANGED!

http://www.reffonomics.com/TRB/chapter10/monopolyinteractive1.swf

http://www.reffonomics.com/TRB/chapter10/monopolyinteractivegraph2.swf

Mankiw Pages 327-8

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