Price Discrimination
Monopoly Wrap-Up
Chapter 15 Completion
Single Price Monopoly
Costs and
Revenue
Despite a monopoly profit, many consumers still
pay less than they are willing to…
MC
P1
E1
Monopoly
Profit
ATC
ATC
D
MR
0
Q1
Quantity
PRICE DISCRIMINATION
• Price discrimination is the business practice of selling the same
good at different prices to different customers
• For a Firm to price discriminate it must:
– have some market power (some price control)
– be able to identify & separate groups of consumers
– be able to prevent resale between consumers
Examples of Price Discrimination
Coupons
AP Exams
$55 LATE FEE
Grants, discounts
for some….
Cell Phone “Calling Plans”
2 Types of Price Discrimination
1) Imperfect Price Discrimination
–
–
Charging some customers different prices
Qty produced could rise, fall or stay the same
2) Perfect Price Discrimination
–
–
(also called 1st Degree)
Each customer charged the maximum price they would pay
Quantity sold = competitive quantity (No DWL)
“Imperfect” Price Discrimination
• It always raises monopolist profits
– By charging higher prices to some customers
• It can lower deadweight loss
– Only when market gets “bigger”
• It can raise, lower or leave Total Welfare unchanged
Imperfect Price Discrimination
Costs and
Revenue
Charge some customers more than P1 &
profits will rise!
MC
Example: raise price but offer
coupons to some customers
E1
P1
Monopoly
Profit
ATC
ATC
D
MR
0
Q1
Quantity
Perfect Price Discriminating
Each Consumer pays the maximum price they are willing!
Every consumer is charged a different
price so the demand curve becomes
the MR curve!
Consumer surplus &
DWL are eliminated!
Quantity Produced =
Competitive Quantity
Same Qty as perfect competition
Worksheet
• Price Discrimination
Monopoly
Review
Competitive firms always produce at
Allocative Efficiency which is P
= MC
Price
MC Single Price Monopolies
set MC = MR so
P > MC so DWL exists
DWL
Monopoly
price
Competitive
EM
P > MC
EC
Allocative Efficiency
P = MC
Price
D=
Market Demand Curve
MR
0
Monopoly Competitive
quantity
quantity
Quantity