2 Aims and Learning Outcomes explore price discrimination by monopolists and the potential welfare effects.By the end of this session you will be able toexplain first, second and third degree price discrimination using graphical and numerical examplesexplain two part tariffs and block pricing.
3 First Degree Price discrimination Seller must know each consumerstotal willingness to payEffect is for producer to extracttotal consumer surplus as a profitPmNote: This is better for society than pure monopoly but it does raise distribution questionsPpcMC = ACDMRQQmQpc
4 Second Degree Price discrimination Charging different prices based on customer use rates.ExamplesBuy 2 get one half priceFirst 100 units at a higher price than second 100 units
5 Second Degree Price discrimination Note Again: This is better for society than pure monopoly but it does raise distribution questionsP1Q2P2MC = ACDQQ1
6 Third Degree Price Discrimination Charging different prices to different types of consumer.Examples include:Geographical price differencesprices aimed at educational and private sector markets.Variation in prices between domestic and commercial customers.Note buyers in one market cannot resell in another
7 Some Maths Assume 2 demands for a big event Public demand Qp = Ppstudent DemandQs = PsCosts of running eventTC = £1,500,000 + £25QShould we charge a uniform price or discriminate?
8 A Uniform Price Total Demand: Qt = Qp + Qs P = £145 - £0.001Q Qt = 145, PP = £145 - £0.001QMR = QMC = 25Q = 60,000P = £85Profit =TR - TC = £2.1 million
10 Third Degree Price discrimination Note Once More: This is better for society than pure monopoly but it does raise distribution questionsMCP1Q1Q2P2PQ = Q1 + Q2market 1market 2Total marketRemember that moving from a single monopoly to a discriminating one raises the price in low elasticity markets. These consumers are losing out. So what value should we be putting on their marginal unit of output.
11 Third Degree Price Discrimination Rule To maximise profits, a firm with market power produces the output at which MR in each market = Group MC.Note too the relationship between MR in each market and elasticity.MRx= Px (1 + 1) = MCeMRy= Py (1 + 1) = MCeThe implication of this is that Firms should charge higher pricesin markets where elasticity is low (inelastic) and lower pricesin markets with high elasticities
12 Two Part PricingA firm can enhance it’s profits by engaging in two part tariffsCharge a price per unit that equals marginal cost plus a fixed fee equal to the consumer surplus each consumer receives at this per unit price.ExamplesGyms, Golf Clubs
13 Block TariffsBy packaging units of a product and selling them as one package, the firm earns more than by single unit pricing.The profit maximising price on the package is the total value the customer receives for the package, including consumer surplus.Examplessix packs, toilet rolls etc