Price Discrimination and its impacts on efficiency inMonopolistic markets (econclassroom14:51)http://www.econclassroom.com/?p=3118

Outline:

Define price discrimination Three conditions necessary because that price discrimination Three types (degrees) that price discrimination The effect of perfect price distinguish on effectiveness (graph)

Definition: Price distinguish occurs as soon as a firm v marketpower charges different prices to consumers for an identicalproduct.

You are watching: A perfectly price-discriminating monopolist is able to

ME: keep in mind that the word "discrimination" go not average that this is a negative thing. Every "discrimination" way is that various customers are treated differently, i.e. Lock pay different prices. Us will find out the price discrimination might actually be great for society.

Examples:

Movie theaters: Charge various prices based on age. Seniors and also youth pay less due to the fact that they tend to be more price sensitive. Gas stations: Gas stations will charge different prices in various neighborhoods based upon relative demand and also location. Amount discounts: grocery stores provide discounts for mass purchases by client who are price sensitive (think “buy one gallon that milk, acquire a second gallon free”… the family of 6 is price sensitive and is most likely to pay less per gallon 보다 the double income pair with no kids who would never ever buy 2 gallons the milk). Hotel room rates: part hotels will certainly charge much less for customers that bother to ask about special room prices than to those that don’t even bother come ask. Telephone plans: part customers who ask their provider for special rates will discover it exceptionally easy to get better calling prices than if lock don’t bother to ask. Airline ticket prices: Weekend stayover discounts for recreation travelers mean business people, whose demand for flights is extremely inelastic, yet who will hardly ever stay over a weekend, salary far an ext for a round-trip ticket that departs and returns throughout the week.

Three conditions necessary because that price discrimination come occur:

certain must have actually market strength (therefore purely competitive firms cannot price discriminate, however monopolies can firm must be able to segregate customers with different willingnesses to salary which method with different price elasticities of demand ME: those with a much less elastic demand are charged a greater price. For this reason what wake up to total revenue (TR)? We understand that if demand is inelastic and price goes up, TR increase. Those v elastic demand are charged a reduced price. Therefore what happens to TR? We understand that if demand is elastic and price go down, TR increase. Our textbook specifies price discrimination as "the selling of a product to various buyers at various prices as soon as the price differences are no justified by differences in cost.
so charging much more for a car in Alaska and also less because that one in Detroit because it costs more to delivery the vehicle to Alaska is not price discrimination But, since we assume the the expenses (TC) space the same, the an outcome of price discrimination is higher TR with the same TC, So, greater PROFITS buyers are prevented native reselling the product to who else

Example: Airline tickets

ME: airlines have actually market power which method that castle can set their own price

ME: company travelers have a much less elastic demand curve 보다 vacation travelers, yet how have the right to the airline know if a ticket buyer is a company traveler or a holidays traveler? One means is to require a Saturday night stay for client buying round-trip tickets. Organization travelers choose to be residence on weekends and vacation travelers have tendency to want to be on vacation over the weekend

resale is prevented because your surname is top top the ticket and also you must have a corresponding ID

Three varieties (degrees) that price discrimination

3rd Degree: whereby consumers are divided into GROUPS. For example, period groups with various price elasticities (movies tickets space cheaper for kids and more expensive for adults), or time of purchase (people who buy beforehand pay less than those who buy in ~ the critical moment).

2nd Degree: whereby price distinguish is based on the amount purchased. Because that example, to buy in mass (large quantities) is cheaper than buying little quantities or two-for one (or purchase two get one free). The much more you buy the much less you pay every unit

1st Degree: likewise called "Perfect Price Discrimination". This is whereby each individual consumer pays a different price, each customer pays the highest price that he or she is ready to pay based on their demand. This way there will certainly be no customer surplus yet a lot of producer surplus.

The result of Perfect Price differentiate on performance (graphshowing third degree price discrimination)

REVIEW: Graph of a "single-price" monopolist maximizing profit. "Single-price" method that there is no price differentiate
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So, if this monopolist did not price discriminate they would produce quantity Qm and also charge price Pm. (They will create the quantity where MR=MC.) ME: and also at Qm, ns > MC for this reason the monopolist is not allocatively efficient.

PRICE DISCRIMINATION: But notification that the need curve goes over Pm, an interpretation that there room customers ready to pay more than Pm. What would happen if the monopolist can charge this customers more since they are willing to salary more? What happens is: if the monopolist deserve to charge every customer the greatest price the they room willing to pay, then MR will certainly be the same as price (or demand).

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D = mr or ns = MR

So, what quantity will the perfect price discriminating monopolist produce to maximize profits? This is constantly where MC=MR. Always.

On the graph, if p = grandfather then mr = MC where P = MC. You should remember the this is the formula provided to discover allocative performance (the socially optimal quantity)

Results that perfect price discrimination:

more will be produced than a single-price monopolist (Qp=MC on the graph below) part consumers will certainly pay greater prices than they would if there to be no price distinguish (Pm), but other consumers will pay lower prices revenues will be better (the blue plus the yellow locations on the graph below) and also MOST importantly the perfectly price discriminating monopolist will develop the allocatively efficient quantity!

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Conclusion:

1st degree price differentiate is almost impossible and therefore really uncommon. Second and 3rd degree price differentiate are more common but, 2nd and 3rd degree price discrimination carry out not accomplish the same increase in calculation as perfect price discrimination and therefore do not accomplish the same level the allocative efficiency, yet they room still better than a single-price monopolist. Effects: an ext is produced consumer surplus is moved to the producers in the type of greater revenues and also profits Is price discrimination great for society? it depends: correctly - the is far better for the monopolist due to the fact that they get higher profits correct - it does enhance allocative effectiveness NO - if girlfriend are among the client who has to pay one even greater price yes - if girlfriend are among the customers who gets the product in ~ a lower price, and if there to be no price discrimination, you would certainly not gain the product at every

Natural syndicate and the require for government Regulationhttp://www.econclassroom.com/?p=3115

What is a "Natural Monopoly"?

syndicate where the lengthy run ATC curve has economic situations of scale over a very large range of output You deserve to identify the graph of a natural monopoly because the demand (D) curve the cross the ATC curve when the ATC is still bottom sloping this means that one very huge company can produce every thing that is demanded in ~ AT lower AVERAGE cost than if there to be several contending firms Examples: giving water to homes in a city electric utilities natural gas If there were plenty of companies each serving just a couple of customers the ATC (costs per unit of output) would certainly be greater it would certainly make more sense to have actually only one company carry out the product because then the prices per unit (ATC) would certainly be lower. That is why this is referred to as a "natural" monopoly. This is due to the fact that there are an extremely high fixed expenses (TFC). Think of all the prices of running water pipes come every residence in a city. These are all solved costs. And also since the TFC are really very high, then the TC will certainly be an extremely high, and the only method to gain ATC to be low is to have a big amount of output (Q) ATC = TC / Q if TC are an extremely high because of an extremely high TFC then: ATC is high if: ATC = high TC / low Q but, ATC would be low if : ATC = high TC / huge Q

Compare graphs:

graph of a regular monopoly graph the a natural syndicate (EoS - economies of Scale)

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So, culture is far better off (lower costs) if only one for sure producesthe product, BUT:

what will certainly a profit maximizing monopolist perform is such a case? castle would produce the profit maximizing quantity, whereby MR = MC and also this is not the allocatively effective quantity like various other monopolists, a organic monopolist will charge a higher price (Pm) and produce a reduced quantity (Qpm) than the socially optimum (alloc. Eff.) price the Pso and quantity the Qso Result: allocative inefficiency; an underallocation of sources ME: therefore WHAT WE obtain (Qpm) is much less than WHAT WE desire (Qso)

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To really advantage society, herbal monopolies have to be regulatedby the government

This method that the federal government should usage price controls and subsidies to attain allocative efficiency, Qso however what price should the federal government select? if the government puts ~ above a price ceiling at the allocatively reliable price of Pso the monopolist would certainly then develop the allocatively efficient quantity that Qso since the ceiling price i do not care the firm"s MR and then grandfather = MC at Qso BUT, we deserve to see the at Qso the ceiling price is much less than the ATC and also the monopoly would be earning losses same to the blue rectangle on the graph below in the long run, businesses cannot run at a loss and they will certainly go out of business. This would not be an excellent for society.

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What deserve to the government do to prevent herbal monopolies indigenous going out of business because to the price ceiling? they have the right to use BOTH a price ceiling and also a subsidy to help the monopoly produce the socially optimum quantity. ME: our textbook walk NOT use the subsidy graph presented in the video clip lecture (see below)

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ME: our textbook says that there room two solutions to the trouble of organic monopolies earning a loss at the allocatively effective price: administer a subsidy come cover your losses yet this may be politically unpopular. Would certainly you support higher taxes to provide money to republic Edison electrical company? the other solution that is offered a lot of in the united claims is AC pricing, whereby the government does not collection a price ceiling at the allocatively effective price (Pso), yet rather they placed the price ceiling in ~ a prise whereby D=ATC (where the need curve crosses the ATC curve).

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If the price is Pac climate the firm will produce Qac is the allocative efficient? NO, yet it is closer come Qso will certainly the this firm earn profits or losses? They will certainly earn normal profits (profits = zero) and they will be able to stay in business. (Remember: economic costs include the clearly costs and the implicit price which method that investors room earning a return on their investment roughly equal to your next best alternative.)