Price discrimination

A producer is able to charge consumers, who have different tastes

and preferences, different prices for the same good

Price discrimination

Conditions or

Assumptions:

When producers have market power

and

They sell a good that cannot be resold

Always assume the short-run and profit-maximizing output, unless

directed otherwise• A perfectly competitive firm would produce

the output at which price is equal to– A) Average cost– B) Marginal cost– C) Marginal revenue– D) Average revenue

Always assume the short-run and profit-maximizing output, unless

directed otherwise• A perfectly competitive firm would produce

the output at which price is equal to– A) Average cost– B) Marginal cost– C) Marginal revenue– D) Average revenue

• A monopolist would produce the output at which marginal cost is equal to– A) Average cost– B) Price– C) Marginal revenue– D) Average revenue

• A monopolist would produce the output at which marginal cost is equal to– A) Average cost– B) Price– C) Marginal revenue– D) Average revenue

Using the table you created

• Prove that consumer surplus (*calculated in whole dollar increments) at a price of $17 is a total of $6.– (hint): the first consumer, willing to pay $20,

has a surplus of $3

– *this method uses addition of incremental whole dollar amounts rather than the geometric formula for a triangle (($21-17)*4)/2

AR, (D)

$20

$17

$14

0

$10

114

3

21

Whole dollar amounts of individual consumer surplus at a market price of $17

3+2+1=6 or 2x3=6

Using the table you created

At a price of $17 consumer surplus (*calculated in whole dollar increments) is a total of $6.– (hint): the first consumer, willing to pay $20, has a

surplus of $3

– The triangle area formula works if you use the first price ($20) for the first whole unit (1) :

• (($20-17)x4)/2 = ($3x4)/2 = $6 or

(20-17)+(19-17)+(18-17) = 6 3 + 2 + 1 = 6 3 x 2 = 6

Assume the average costs and marginal costs are constant and equal to $14.

• If Pat chose to produce the perfectly competitive output and charge the perfectly competitive price; she will charge, supply, and generate whole dollar consumer surplus in the following amounts:

price output consumer surplus

a) $17 4 $6

b) $14 7 $49

c) $14 7 $21

d) $11 10 $110

AR, (D)

industry

$20

$17

$14

0

$10

114 7

65

43

21

Whole dollar amounts of individual consumer surplus at a market price of $14

(6+5+4+3+2+1)= 21 or 3½ x6=21

The competitive firm would produce output, where P=MC

(P=MR) because

MR is equal to Demand for the competitive firm

AC, MC, MR, AR

Firm DEMAND

Assume the average costs and marginal costs are constant and equal to $14.

• If Pat chose to produce the perfectly competitive output and charge the perfectly competitive price; she will charge, supply, and generate consumer surplus in the following amounts:

price output consumer surplus

a) $17 4 $6

b) $14 7 $49

c) $14 7 $21

d) $11 10 $110

Assume the average costs and marginal costs are constant and equal to $14.

• If Pat chose to produce the monopoly output and charge the monopoly single price; she will charge, supply, and generate whole dollar consumer surplus in the following amounts:

price output consumer surplus

a) $17 4 $6

b) $14 7 $49

c) $14 7 $21

d) $11 10 $110

price

AR, (D)

MR

AC, MC

$20

$17

$14

0

$10

11

The competitive firm would produce output, where P=MC

(P=MR)

because MR is equal to D

The monopolistic firm would produce output, where MR=MC

(P>MR)

because MR lies below demand

4 7

P

Q

price

AR, (D)

MR

AC, MC

$20

$17

$14

0

$10

11

The competitive firm would produce output, where P=MC

(P=MR)

because MR is equal to D

The monopolistic firm would produce output, where MR=MC

(P>MR)

because MR lies below demand

4 7

P

Q

1

Assume the average costs and marginal costs are constant and equal to $14.

• If Pat chose to produce the monopoly output and charge the monopoly single price; she will charge, supply, and generate whole dollar consumer surplus in the following amounts:

price output consumer surplus

a) $17 4 $6

b) $14 7 $49

c) $14 7 $21

d) $11 10 $110

Assume the average costs and marginal costs are constant and equal to $14. Further assume that Pat knows the

different tastes and preferences of all consumers and the conditions that allow price discrimination apply

• How many tattoos will Pat supply?

• At what price will she charge for the tattoos?– A) $20, B)$19, C)$18, D)$17, E)$16, F)$15, G)$14

• What consumer surplus will be generated?

AR, (D)

$20

$17

$14

0

$10

114 7

65

43

21

The price discriminating monopolistic firm can capture all whole dollar consumer surplus as profit, by charging each consumer what he is willing and able to pay for the same good

(6+5+4+3+2+1)= 21 or 3½ x6=21

MR

AC, MC

Assume the average costs and marginal costs are constant and equal to $14. Further assume that Pat knows the

different tastes and preferences of all consumers and the conditions that allow price discrimination apply

• How many tattoos will Pat supply?7

• At what price will she charge for the tattoos?A) $20, B)$19, C)$18, D)$17, E)$16, F)$15, G)$14

• What consumer surplus will be generated?0

• Describe the profit situation for the perfect competitor, the discriminating monopoly, and the non-discriminating monopoly.

Assume the average costs and marginal costs are constant and equal to $14 for all firms, and the conditions that allow price discrimination apply

• Describe the profit situation for the perfect competitor, the discriminating monopoly, and the non-discriminating monopoly.

• The profits for the discriminating monopoly will be highest, the perfect competitor will be lowest, and the non-discriminating monopoly will lie in between

Assume the average costs and marginal costs are constant and equal to $14 for all firms, and the conditions that allow price discrimination apply

AR, (D)

$20

$17

$14

0

$10

114 7

65

21

The price discriminating monopolistic firm can capture all whole dollar consumer surplus as profit, by charging each consumer what he is willing and able to pay for the same good

(6x7)/2 = 21

(6+5+4+3+2+1)= 21 or 3½ x6=21

MR

AC, MC

Non-discriminating monopoly profit

$3 x4 =$12

The effects of price discrimination-some typical free response questions

• What happens to consumer surplus if a firm successfully price discriminates?

• What happens to a firm’s profits if it successfully price discriminates?

• What happens to the quantity supplied by a successful price discriminating firm compared with a non-price discriminating firm?

• How does the quantity supplied by a successful price discriminating firm compare with quantity supplied by firms in a perfectly competitive industry?

• How does price discrimination affect economic efficiency?

What happens to consumer surplus if a firm successfully

price discriminates?

What happens to consumer surplus if a firm successfully

price discriminates?

If a firm successfully price discriminates, consumer surplus

decreases

What happens to a firm’s profits if it successfully price

discriminates?

What happens to a firm’s profits if it successfully price

discriminates?

If a firm successfully price discriminates, its profits increase

What happens to the quantity supplied by a successful price

discriminating firm compared with a non-price discriminating firm?

What happens to the quantity supplied by a successful price

discriminating firm compared with a non-price discriminating firm?

the quantity supplied by a successful price discriminating firm

is greater than a non-price discriminating firm

How does the quantity supplied by a successful price discriminating firm compare with quantity supplied by

firms in a perfectly competitive industry?

How does the quantity supplied by a successful price discriminating firm compare with quantity supplied by

firms in a perfectly competitive industry?

the quantity supplied by a successful price discriminating firm is the same as the quantity

supplied by firms in a perfectly competitive industry

How does price discrimination affect economic efficiency?

How does price discrimination affect economic efficiency?

price discrimination improves economic efficiency

because output is increased and price is closer to marginal cost

What are some real examples of price discrimination?

What are some real examples of price discrimination?

• Charging different airline passengers different prices for the same ticket

• Providing discounts on cars by negotiating with each customer on an individual basis

• Providing college scholarships for low-income students but not wealthier ones

• Corporate or business discounts but not personal or household

• Senior citizen discounts

What factors make price discrimination easier?

What factors make price discrimination easier?

• An inelastic demand curve

• The product cannot be resold easily

• Categories of customers can be separated in the market

Is price discrimination good or bad?

Is price discrimination good or bad?

• On the negative side, – it decreases consumer surplus while it

increases a firm’s profits

• On the positive side,– It increases output– More consumers will now buy the product– It results in a more efficient output,

• allocation of resources