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Price
Monopolies creates a DWL
Uniform Price Monopoly
CS:
E+F
PS:
G+H+K+L
TS:
E+F+G+H+K+L
DWL: J+N
0
E+F+G+H+J+K+L+N
E+G+G+H+J+K+L+N
0
Pm E F
H
G
Pc
K
MC
J
N
L
D
MR
Quantity
The monopolist's profit maximization condition requires:
[P* - MC(Q*)]/ P* = -1/, at the profit max P*, Q*
In words, the monopolist's ability to price
above marginal cost (markup) is inversely related to the price
elasticity of demand.
Example: DD: Q = 100P -2 and constant MC = $50, so
(P-50)/ P = ½
Solving for P we get P = $100
Prices for UA Flight 815 (1997) Chi to LA
Ticket Price
Number of
Passengers
 $2000
18
Average
Advance
Purchase
12 days
$1000-$1999
15
14 days
$800-$999
23
32 days
$600-$799
49
46 days
$400-$599
23
65 days
$200-$399
23
35 days
$1-$199
34
26 days
$0
19
-
Definitions A monopolist:
• charges a uniform price if it sets the same price for
every unit of output sold.
• price discriminates if it charges more than one price
for its output.
While the monopolist captures profits (or decreases losses)
due to an optimal uniform pricing policy, it does not receive
the consumer surplus or dead-weight loss associated with
this policy.
The monopolist can overcome this by charging more than
one price for its product.
Definition: A policy of first degree (or perfect) price
discrimination prices each unit sold at the consumer's
maximum willingness to pay. This willingness to pay is
directly observable by the monopolist.
Definition: The consumer's maximum
willingness to pay is called the consumer's reservation
price.
Price
Example: Uniform Pricing vs. Price Discrimination
Uniform Price Monopoly 1st Degree P.D. Monopoly
CS: E+F
0
PS: G+H+K+L
E+F+G+H+J+K+L+N
TS: E+F+G+H+K+L E+G+G+H+J+K+L+N
DWL: J+N
0
PU E F
H
G
P1
K
MC
J
N
L
D
MR
Quantity
Definition: A seller engages in second-degree price
discrimination by offering consumers a quantity discount. (e.g.,
computer software.)
Another type of second-degree price discrimination:
A monopolist charges a multipart tariff if it charges a a lump
sum fee (paid whether or not a positive number of units is
consumed), F, plus a per unit fee, r X q.
This, effectively, charges demanders of a low quantity a different
average price than demanders of a high quantity.
Example: hook-up charge plus usage fee for a telephone….club
membership…
Capturing Surplus with Second-Degree
Price Discrimination
Definition: A policy of third degree price
discrimination offers a different price for each segment
of the market (or each consumer group) when
membership in a segment can be observed and resales
between consumer groups can be prevented.
Example: Movie ticket sales to older people or students
at discount
Suppose that marginal costs for the two markets are
the same. How does a monopolist maximize profit with
this type of price discrimination?
Example: Third Degree Price Discrimination
Market 1
Market 2
P
100
P
Demand 1
80
60
Demand 2
50
20
0
100
MR1
Q
0
20
40
MR2
Q
Pricing Coal and Grain Movements by Rail