1. Monopoly Pricing
By Kevin Hinde

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 to
explain first, second and third degree price discrimination using graphical and numerical examples
explain two part tariffs and block pricing.

3. First Degree Price discrimination
Seller must know each consumers
total willingness to pay
Effect is for producer to extract
total consumer surplus as a profit Pm
Note: This is better for society than pure monopoly but it does raise distribution questions
Ppc
MC = AC D MR Q Qm
Qpc

4. Second Degree Price discrimination
Charging different prices based on customer use rates.
Examples
Buy 2 get one half price
First 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 questions P1 Q2 P2
MC = AC D Q Q1

6. Third Degree Price Discrimination
Charging different prices to different types of consumer.
Examples include:
Geographical price differences
prices 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 = Pp
student Demand
Qs = Ps
Costs of running event
TC = £1,500,000 + £25Q
Should we charge a uniform price or discriminate?

8. A Uniform Price Total Demand: Qt = Qp + Qs P = £145 - £0.001Q
Qt = 145, P
P = £145 - £0.001Q
MR = Q
MC = 25
Q = 60,000
P = £85
Profit =TR - TC = £2.1 million

9. A discriminatory price
Public Demand
Pp = Qp
MRp = Qp
MRp = MC
Qp = 20,000
Pp = £125
Student Demand
Ps = Qs
MRs = Qs
MRs = MC
Qs = 40,000
Ps = £75
Profit = TRp + TRs - TC
= £2.5 million

10. Third Degree Price discrimination
Note Once More: This is better for society than pure monopoly but it does raise distribution questions MC P1 Q1 Q2 P2 P
Q = Q1 + Q2
market 1
market 2
Total market
Remember 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) = MC e
MRy= Py (1 + 1) = MC e
The implication of this is that Firms should charge higher prices
in markets where elasticity is low (inelastic) and lower prices
in markets with high elasticities

12. Two Part Pricing
A firm can enhance it’s profits by engaging in two part tariffs
Charge 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.
Examples
Gyms, Golf Clubs

13. Block Tariffs
By 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.
Examples
six packs, toilet rolls etc

14. And Finally...
A summary
Any Questions?