MONOPOLY AND PRICE DISCRIMINATION

MONOPOLY & PRICE DISCRIMINATION

Price Discrimination

Single-price monopoly

Firm that is limited to changing same price for each unit of output sold

Price discrimination occurs when a firm charges different prices to different customers for reasons other than differences in costs

Price-discriminating monopoly does not discriminate based on prejudice, stereotypes, or ill-will toward any person or group

Rather, it divides its customers into different categories based on their willingness to pay for good

Requirements for Price Discrimination

Although every firm would like to practice price discrimination, not all of them can

To successfully price discriminate, three conditions must be satisfied

–        Must be a downward-sloping demand curve for the firm’s output

–        Firm must be able to identify consumers willing to pay more

–        Firm must be able to prevent low-price customers from reselling to high-price customers

Price Discrimination That Harms Consumers

•          Price discrimination always benefits owners of a firm

–        Can use this ability to increase its profit

•          When price discrimination raises price for some consumer above price they would pay under a single-price policy it harms consumers

–        Additional profit for the firm is equal to monetary loss of consumers

Price Discrimination That Benefits Consumers

•          Price discrimination benefits monopoly at the same time it benefits a group of consumers

•          Since no one’s price is raised, no one is harmed by this policy

–        When price discrimination lowers price for some consumers below what they would pay under a single-price policy, it benefits consumers as well as firm

Perfect Price Discrimination

•          Suppose a firm could somehow find out maximum price customers would be willing to pay for each unit of output it sells

•          It could increase profits even further by practicing perfect price discrimination

–        Firm charges each customer the most the customer would be willing to pay for each unit he or she buys

–        Increases profit at expense of consumers

•          Perfect price discrimination is very difficult to practice in the real world

–        Would require firm to read its customers’ minds

•          Marginal revenue is equal to price of additional unit sold

–        Firm’s MR curve is same as its demand curve