Bellringer slates1. 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!

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

Other examples:Car insurance, young menMilitary/teacher/police discountAirline ticketsProm ticketsUniversity tuitionMedical servicesSeason vs. single game tickets

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

10

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

11

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 today, THINGS HAVE CHANGED!

Closure1. Agree/Disagree: price

discrimination should always be illegal

2. Price discrimination can’t happen under perfect competition

3. City of New York shouldn’t allow Soup Nazi to operate >>>>