Transcript pptx - Cornell

Monopoly & Price Discrimination
Dr. Jennifer P. Wissink
©2011 John M. Abowd and Jennifer P. Wissink, all rights reserved.
Price Discriminating Monopolists
A
monopolist might be able to charge different
prices for different units sold and enhance its
profits.
– charge different people different prices
– charge the same person different prices for different
units
 Price
Discrimination
– charging different prices for different units with no cost
basis for the differential in price
– charging the same price for different units when there
are cost differences
Requirements For Successful
Price Discrimination
 Some
amount of monopoly power.
 An ability to prevent resale.
 Detailed information about who is buying
what unit, and what that demander is
willing to pay.
Believe It Or Not



What would you do to
prevent resale???
When: 1940’s
Market: plastic molding
powder
– industrial users: .85/pound
– denture manufacturers:
$22/pound



Firm: Rohm and Haas
Problem: resale from
industrial users to denture
manufacturers was reducing
profit
Solution: rumor you are
mixing arsenic in the powder
sold to industrial users!
Two Classic Forms Of
Price Discrimination

Perfect or First Degree(fd) Price Discrimination
– charge a different price for each unit sold
– the most extreme form of price discrimination

Third Degree(td) Price Discrimination
– segment market and then charge a different price in
each market, same price within the market segment
– exploit the observation that at the simple monopoly price
the own price elasticity of demand differs across the
defined segmented markets

Price discrimination comes in many other “flavors”
First Degree Price Discrimination:
Conduct & Performance



The monopolist charges the demand price for each
unit sold.
In this case the market demand curve becomes the
monopolist’s marginal revenue curve.
Note: The monopolist does not lower the price on all
preceding units to sell the next!
Graphical Display Of First Degree Price
Discrimination Profit Maximizing Solution

(1) The
monopolist sets
marginal revenue
equal to marginal
cost.
– Then goes up to
the demand
curve to get the
prices for each
unit.

(2) Then makes
sure he is at a
max (and not a
min).

(3) Then makes
sure it is worth
operating in the
short run.
$
mc
P last
Demand= Marginal
Revenue
Qfd
Q
Performance Of First Degree Price
Discrimination Profit Maximizing Solution

The first degree
discriminating monopoly
equilibrium is allocatively
(Pareto) efficient.

At Qfd, $MBsoc = $MCsoc

NO Dead-Weight-Loss!

All net social surplus goes to
the monopolist.

PS=NSS

CS=0

The First Degree
Discriminating equilibrium
may or may not be
productively efficient.
$B
P last
mc = MCsoc
C
A
Demand= Marginal
Revenue=
MBsoc
Qfd
Qpe
Q
Third Degree Price Discrimination:
Conduct & Performance

The monopolist separates his market into “segments.”
–
–
–
–
–



by age
by gender
by income
by zip code
by attitudes
The monopolist charges a different price to each segment.
The monopolist charges the same price on all units sold
WITHIN the same segment.
When will this type of discrimination yield MORE profits
than under simple monopoly?
Third Degree Price Discrimination:
Conduct & Performance
$
Pa
Ps
D
D
mr
mc
mc
mr
Qa
Qs
Q
Price Discrimination in the Movie Theatre Market
Quantity adult Quantity senior Total Demand Single Price Total
Price per ticket movie tickets movie tickets
for Tickets
Revenue


Single Price
Marginal
Revenue
Adult Total
Revenue
Adult Price
Marginal
Revenue
3,200
Senior Price
Marginal
Revenue
Senior Total
Revenue
16.00
200
0
200
3,200
2.00
2,800
15.50
225
25
250
3,875
13.00
3,488
11.00
388
15.00
2.00
3,375
15.00
250
50
300
4,500
12.00
3,750
10.00
750
14.00
2.00
3,900
14.50
275
75
350
5,075
11.00
3,988
9.00
1,088
13.00
2.00
4,375
14.00
300
100
400
5,600
10.00
4,200
8.00
1,400
12.00
2.00
4,800
13.50
325
125
450
6,075
9.00
4,388
7.00
1,688
11.00
2.00
5,175
13.00
350
150
500
6,500
8.00
4,550
6.00
1,950
10.00
2.00
5,500
12.50
375
175
550
6,875
7.00
4,688
5.00
2,188
9.00
2.00
5,775
12.00
400
200
600
7,200
6.00
4,800
4.00
2,400
8.00
2.00
6,000
11.50
425
225
650
7,475
5.00
4,888
3.00
2,588
7.00
2.00
6,175
11.00
450
250
700
7,700
4.00
4,950
2.00
2,750
6.00
2.00
6,300
10.50
475
275
750
7,875
3.00
4,988
1.00
2,888
5.00
2.00
6,375
10.00
500
300
800
8,000
2.00
5,000
0.00
3,000
4.00
2.00
6,400
9.50
525
325
850
8,075
1.00
4,988
-1.00
3,088
3.00
2.00
6,375
9.00
550
350
900
8,100
0.00
4,950
-2.00
3,150
2.00
2.00
6,300
8.50
575
375
950
8,075
-1.00
4,888
-3.00
3,188
1.00
2.00
6,175
8.00
600
400
1,000
8,000
-2.00
4,800
-4.00
3,200
0.00
2.00
6,000
7.50
625
425
1,050
7,875
-3.00
4,688
-5.00
3,188
-1.00
2.00
5,775
7.00
650
450
1,100
7,700
-4.00
4,550
-6.00
3,150
-2.00
2.00
5,500
6.50
675
475
1,150
7,475
-5.00
4,388
-7.00
3,088
-3.00
2.00
5,175
6.00
700
500
1,200
7,200
2.00
4,800
4,200
0
Single Price
Marginal Cost Economic Profits
3,000
The best single price in this market is $10/ticket, which makes economic profits of $6,400 (light blue
entries). Set marginal cost = marginal revenue with the single price.
The price discriminating monopolist can make more economic profits by charging adults $11 (light
red entries) and seniors $9 (light yellow entries). Set marginal cost = marginal revenue separately
for each market.
Summary Of Price Discrimination
Example
Profit Maximum with 2 Prices
Economic profits adult market
Economic profits senior market
Total with price discrimination
Total without price discrimination
 Calculating
4,050
2,450
6,500
6,400
economic profits separately
for the two markets (adult and senior)
shows that the total is greater than with
the best single price.
Believe It Or Not
 When:
early 1990’s
 Market: contact lenses
 Firm: Bausch & Lomb
 Lenses:
–
–
–
–
Optima @ $70/pair - wash and keep 1 year
Medalist @ $15/pair - wash and keep 2 months
SeeQuence 2 @ $8/pair - wash and keep 2 weeks
Occasions @ $3/pair - daily and disposable each day
 Guess
what?
Believe It Or Not
 They
were all the same lenses!
 Just packaged differently!
 What would you pay for a year?
–
–
–
–
Optima = $70/pair - wash and keep 1 year
Medalist = $15x6=$90 (last 2 months)
SeeQuence 2 = $8x26=$208 (last 2 weeks)
Occasions = $3x365 = $1095
 What
would I do? Buy the Occasions and wash and
wear until my eyes hurt.
 Class
action suits were eventually settled.
More Ways To Discriminate
 Information
or Knowledge
 Time
 Flexibility
 Business
versus Leisure
 New versus Repeat Customer
 Human versus Animal
 Local versus Tourist
Two Part Tariffs To Discriminate
 Consider
two cell phone plans
– PLAN A:
» Monthly fee=$20, no free minutes or
free texting, 65¢ per minute
– PLAN B:
» Monthly fee=$100, 1000 free minutes,
unlimited texting, then 45¢ per minute
Is It Illegal?


Given as much of it as we see… it can’t be illegal, right?
But…The Robinson-Patman Act is a 1936 statute (15 U.S.C.A. § 13(a–
f) that amended Section 2 of the Clayton Act (Oct. 15, 1914, ch. 323, 38
Stat. 730), which was the first antitrust statute aimed at price
discrimination. The Robinson-Patman Act prohibits a seller of
commodities from selling comparable goods to different buyers at
different prices, except in certain circumstances.
– http://legal-dictionary.thefreedictionary.com/Robinson-Patman+Act

A brief bit of history…
Is It Bad?
 Loaded
question….