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Monopoly Pricing By Kevin Hinde.

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Presentation on theme: "Monopoly Pricing By Kevin Hinde."— Presentation transcript:

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?

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