A simple way to reduce the cost for your lunch at Maxim

Dai Liang, Johnny

2006830225

A bestseller

Each set meal includes a bowl of rice, a cup of drink, and the corresponding number of dishes.

My observation

For customers who want different number of dishes, the price for each dish is different.

Assume the price for rice and drink of each set is the same, which amounts 4 dollars. Here are the prices for each dish:

$(16-4)/1=$12 $(19-4)/2=$7.5 $(22-4)/3=$6 $(25-4)/4=$5.25

Maxim groups the customers according to the number of dishes they need and sets price respectively for them.

Since the dishes available are exactly the same, why not setting a single price according to P=MB=MC?

A premise

Maxim is a price setter instead of a price taker because of its monopoly due to the particular location.

Assume there are only 2 customers, Johnny and Victor, who purchase dishes at Maxim.

Here is their reservation prices:

for this additional dish 1 2 3

Johnny $15 $7 $4

Victor $15 $5 $3

And here is the marginal cost for Maxim:

For this additional dish 1 2 3 4

Maxim’s Marginal cost $5 $6 $7 $8

If price is set by P=MB=MC, the market price for one dish will be $7, and the quantity supplied will be 3.

for this additional dish 1 2 3

Johnny $15(1)

$7(3)

$4

Victor $15(2)

$5 $3

For this additional dish 1 2 3 4

Maxim’s Marginal cost $5(1)

$6(2)

$7(3)

$8

The consumer surplus will be $15+15+7-7*3=$16The producer surplus will be $7*3-5-6-7=$3

for this additional dish 1 2 3

Johnny $15(1)

$7(3)

$4

Victor $15(2)

$5 $3

For this additional dish 1 2 3 4

Maxim’s Marginal cost $5(1)

$6(2)

$7(3)

$8

If Maxim groups the customers and sets price respectively for them:

The amount you buy

1 2 3

Total cost $14 $21 $27

If both Johnny and Victor are rational, they will buy the same number of dishes as before.

The consumer surplus will be: $15+15+7-14-21=$2

The producer surplus will be: $14+21-5-6-7=$17

Case Consumer surplus Producer surplus

1 $16 $3

2 $2 $17

•The total economic surplus in both cases remains the same: $19.

•But by employing price discrimination, Maxim transfers $14 from consumer surplus to producer surplus.

By grouping the customers and setting price respectively for them, the supplier can grip more profit from consumer surplus.

How can consumers save money?

If Victor asks Johnny to buy all the dishes they want, the total cost will be $27, $8 less than before.

It is because the supplier assumes the goods is consumed by the customer who gets the goods directly from him. And the price is set according to the rule that MB is decreasing.

The amount you buy

1 2 3

Total cost $14 $21 $27

34% DISCOUNT FOR FREE!!

Buy a 4-dish-set and share it with your friend, each of you can immediately save

$(19*2-25)/2=$6.5, which is a 34% discount!

Thank you!