discrimonop - Monopoly Price Discrimination 1st...

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Chapter 15 Slide 1 Monopoly Price Discrimination ± 1 st degree (perfect price discrimination): charge each consumer the WTP ± 2 nd degree: use self-selecting devices (personal arbitrage and screening) ± 3 rd degree: use signals (e.g. age, occupation, location ) of consumer’s preference to price- discriminate (note: the difference between 2 nd degree and 3 rd degree is that 3 rd degree uses a direct signal about demand, whereas 2 nd selects indirectly between consumers through their choice between different packages. ) Chapter 15 Slide 2 Topics to be Discussed ± Capturing Consumer Surplus ± Price Discrimination ± The Two-Part Tariff ± Bundling Chapter 15 Slide 3 Introduction ± Pricing without market power (perfect competition) is determined by market supply and demand. ± The individual producer must be able to forecast the market and then concentrate on managing production (cost) to maximize profits. Chapter 15 Slide 4 Pricing with Monopoly Power Quantity D MR MC P m Q m $/Q CS DWL Chapter 15 Slide 5 Example: Disneyland Pricing 1950s-1981: Admission Fee+Charge per Ride 1982: Higher Admission Fee (Adults $12, children $9)+ unlimited rides 2000: Adults $41, children $31 (+other rates, senior), multiple day passes and yearly passports (priced by place of residence). Chapter 15 Slide 6 Capturing Consumer Surplus Quantity $/Q D MR P max MC P C A P* Q* P 1 B P 2 Question How can the firm capture the consumer surplus in A and sell profitably in B? Answer Price discrimination Two-part tariffs Bundling
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Chapter 15 Slide 7 Capturing Consumer Surplus ± Price discrimination is the charging of different prices to different consumers for similar goods. Chapter 15 Slide 8 Price Discrimination ± Perfect Price Discrimination z Charge a separate price to each customer: the maximum or reservation price they are willing to pay. Chapter 15 Slide 9 P* Q* Without price discrimination, output is Q* and price is P*. Variable profit is the area between the MC & MR (yellow). Additional Profit From Perfect First- Degree Price Discrimination Quantity $/Q P max With perfect discrimination, each consumer pays the maximum price they are willing to pay. Consumer surplus is the area above P* and between 0 and Q* output. D = MR MR MC Output expands to Q** and price falls to P C where MC = MR = D. Profits increase by the area above MC between old MR and D to output Q** (purple) Q** P C Chapter 15 Slide 10 ± Question z Why would a producer have difficulty in achieving first-degree price discrimination?
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discrimonop - Monopoly Price Discrimination 1st...

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