Lecture+20

# Lecture+20 - Announcements HW for ch9 due THURSDAY night....

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Announcements HW for ch9 due THURSDAY night. HW for ch 10 due Monday. Practice problems for MT2 are on Scholar. I will post all iClicker questions after Monday’s class. We won’t get through all these slides today. 1 of 38

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Monopolies While not all monopolists make profit, it is possible (and indeed likely) for a monopolist to make positive profits year after year. Is it possible for a monopolist to make even more profit than we’ve seen so far? Yes, if it can price discriminate. 2 of 38
3 of 38 PRICE DISCRIMINATION price discrimination Charging different prices to different buyers. perfect price discrimination Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit. Also called “ First Degree price discrimination.

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Price discrimination and consumer surplus Remember our Gatorade example: What if the 7-11 owner could charge you \$4 for the first Gatorade, \$2 for the second, and \$1 for the third? Then he could make \$7 off of you rather than \$3 (what he earned by charging you \$1 each for all 3) By doing this, he could take ALL your consumer surplus Consumer Surplus 0 1 2 3 4 5 0 1 2 3 4 Q P Pm = 1
5 of 38 PRICE DISCRIMINATION Price Discrimination

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Perfect Price Discrimination 6 of 38 Price Discrimination This firm would have made this rectrangle of profits without price discrimination if it can only charge a single price, and output will be restricted to Qm Quantity \$ MR D = AR S = MC = ATC C.S. that goes to Monopolist Profit under PD Pm Q m Q pd
Price Discrimination While perfect or “first degree” price discrimination is the best for the firm, it is almost impossible to do. Most of the time, firms do not know how much someone is willing to pay for a good. There are other types of price discrimination that are easier to enact. 7 of 38

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Price Discrimination Second Degree Price Discrimination occurs when firms charge different prices based on unobservable consumer attributes. By pricing in strategic ways, firms let consumers “self-select” into groups based on their willingness to pay. Example 1: Costco or Sam’s Club – these firms extract some consumer surplus by charging membership fees that allow you to buy large quantities for cheap. Example 2: Quantity discounts. 8 of 38
Membership fees 9 of 38

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Price Discrimination Third Degree Price Discrimination occurs when firms charge people different prices based on observable consumer attributes. These factors may indicate, in some way, the consumers’ willingness to pay. Example: Cheaper movie tickets for students or seniors. Firms know that these groups have less income so the have a different demand curve than working people. So the smart firm charges them less in an effort to maximize profits.
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## This note was uploaded on 08/30/2011 for the course ART 3514 taught by Professor Dhbannan during the Summer '03 term at Virginia Tech.

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Lecture+20 - Announcements HW for ch9 due THURSDAY night....

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