Transcript Price Discriminationx

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Homework:
Monopoly Micro Packet—Due
Thursday
Unit 1 Test: Thursday
Review Terms???
Price Discrimination
Students will examine the individual motivations and interest of 1st degree price
discriminators in our contemporary economy from multiple perspectives.
Students will explicitly assess price discrimination graphically in order to draw
conclusions as to the “theoretical” social responsibility.
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3-Minute Case Study:
“How Advertisers Can Use Your Personal
Information to Make you Pay Higher Prices” & “Why
Some People Pay More Than Others When Shopping
Online”
1.
How would a businessman/woman react to
these articles?
2.
How would the average consumer react to
these articles?
3.
Are the actions being taken by these firms
socially responsible?
+ Price discrimination as a tool for
social benefits/allocative
efficiency?
Consider the following…
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Doctor’s Office services 4 patients: 3 value the treatment at $5, while
the 4th, and rich, patient values treatment at $8
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Doctor’s Offices FC are $5 and MC of treating 1 patient is $4
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If one uniform price of $5 is charged, all patients will receive
treatment; however, TR<TC (TR = $20 and TC = $21 = 16 + 5)
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The Doctor will not offer treatment!!!
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But, if price discrimination is possible, all patients will pay based on
their willingness to pay…
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TR = $23 ($8 + $5 + $5 + $5) and TC = $21  Doctor will treat all
patients and stay in business!
+ 1st Degree Price Discrimination
Before Discrimination:
3 Criteria for 1st Degree:
1. Market power: Be the sole
supplier of a good, directly
controlling price
2. Ability to segregate market
based on willingness to pay:
recognize and go after
different price elasticities of
demand of consumers
3. Buyers cannot resell good
Price Discrimination = firm
with market power who charges
different prices for identical
goods
st Degree Price Discrimination
1
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Illustrated
Price discriminating monopolies
are like Pac-man….
st Degree Price Discrimination
1
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Illustrated
Price discriminating monopolies
are like Pac-man….they eat up
consumer surplus!
st Degree Price Discrimination
1
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Illustrated
Price discriminating monopolies
are like Pac-man….they eat up
consumer surplus!
st Degree Price Discrimination
1
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Illustrated
By charging any and all
prices above the price
indicated by the profit
maximizing quantities
price, consumer surplus
is eliminated…
All willing buyers have
made transactions!
Price discriminating monopolies
are like Pac-man….they eat up
consumer surplus!
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1st Degree Price Discrimination
Illustrated: Key Concepts
Wait?!? Isn’t that new P/Q
combination also the socially
optimal P/Q (MC = P)???
It sure is! Our price discriminating
monopoly is now allocatively
efficient.
1. When monopoly can make each consumer pay exactly their WTP the
marginal revenue function of the firm changes….MR = D = AR = P.
When MR changes, so does profit maximizing quantity (MR =MC rule)! Q
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1st Degree Price Discrimination
Illustrated: Key Concepts
So, profits have increased…
the monopolist is happy.
But, quantity has increased…
and so is the consumer.
2. When monopoly can make each consumer pay exactly their WTP the firm
generates the highest possible total revenue. Consumer surplus becomes
revenue
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Conclusion: 2-Minute Paper
 On
the back of your “Side-by-Side” sheet answer
the following prompt:
Considering all you have learned, is price
discrimination a socially responsible
practice?