Chapter 9 Monopoly Price Discrimination Price Discrimination n

Chapter 9: Monopoly Price Discrimination

Price Discrimination n n Price discrimination refers to any complicated price strategy that tries to extract consumer surplus and deadweight loss, so as to increase profits, relative to the benchmark case of uniform pricing First degree price discrimination, a. k. a. , perfect price discrimination Second degree price discrimination: consumers are given a menu of packages to choose from Third degree price discrimination: customers have identifiable difference, and resale between customers is (naturally or made) difficult

First degree price discrimination n For instance, each student wants to buy one unit of notebook computer but has a different maximum willingness to pay Under first degree price discrimination, every customer is charged his/her maximum willingness to pay In case of heterogeneous customers, this is quite unlikely and represents an ideal case.

First degree price discrimination n In case of homogenous customers, this brings us to the idea of membership fees. Suppose each HKU faculty member’s monthly demand for meals in its common room is the same, denoted by P = 500 – 80 Q Suppose the marginal cost of each meal is $20.

Membership fee P 500 Under uniform pricing: MR=MC=>Q*=3, P*=260 Perfect price discrimination =>membership fee: A+B+C Each meal’s price = $20 A 260 Socially optimal output B C 20 3 6 Q

Second degree price discrimination n n Give a menu of price packages and let the customers choose which one to accept High fixed fee + low per unit fee Low fixed fee + high per unit fee High usage customers choose the former; low usage customers choose the latter.

Third Degree Price Discrimination n Arcadia Publisher is planning to publish a book. – loyalty to the author is fixed at $2 M – production cost=$0 per copy – two groups of buyers • 100 K group 1 readers--each willing to pay up to $30 • 400 K group 2 readers--each willing to pay up to $5 n n n If p= $30, only group 1 readers will buy the book. Arcadia obtains $30 x 100 K =$3 M (gross of loyalty) If p= $5, both groups of readers will buy the book. Arcadia obtains $5 x 500 K=$2. 5 M (gross of loyalty) Hence, charging $30 is better.

Price Discrimination n n Now suppose Arcadia knows that all group 1 readers are in HK and group 2 readers are in Chile. Then it can charges a fee of $30 for a book sold in HK and $5 for a book sold in Chile. Price discrimination leads to – greater profits – greater social welfare!!

Determination of differentiated prices under constant marginal cost

Evidence of Geographic Price Discrimination n Parallel imports--unauthorized flows of genuine products across countries that compete with authorized distribution channels (ranging from deluxe cars to cheap beer) n It is often thought that parallel imports of HK made movie and music products back into HK market adversely affects the very survival of HK movie and music industry.

Price Discrimination: How to separate different customers n n n Coupons (i. e. , hurdle)--those people who have lower time cost will collect and use coupons to get a discount; they are likely to have lower maximum willingness to pay as well In 1999, CTI charged different fees for its registered IDD users--37 cents/min to US for smart users who made a double registration; $2. 9 /min for not-so-smart users who did not (c. w. HKTC’s 001 and 0060). Educational edition--software companies charge a substantial lower price to teachers and students for their software

Price Discrimination: How to separate different customers n n Hardcover vs paperback--readers of lower maximum willingness to pay are more patient; hence publishing a paperback later attract these buyers without affecting sale to hardcover buyers (compared w. seasonal sales in department stores)--production differentiation in general Different prices for different geographic locations – golf clubs are much more expensive in HK than in the US (HK$4. 5 K vs US$250) – tennis ball--HK’s price is two or three times that in the US