Suppose a movie theater charges children 4 to see a

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: s speech at the Democratic National Convention in 2004, improve or decline if Fox News and MSNBC went off the air? Price Discrimination Price discrimination exists when a seller charges different prices to different buyers, and the price differences do not reflect cost differences. Suppose a movie theater charges children $4 to see a movie and charges adults $8 to see a movie. If the movie theater experiences absolutely no cost difference when it comes to children and adults, this situation would be an example of price discrimination. Now suppose a company runs two small grocery stores: one on the east side of town and one on the west side of town. In the grocery store on the east side of town it charges $3 for a loaf of bread, but on the west side of Section 4 An Oligopolistic Market 215 08 (186-221) EMC Chap 08 11/17/05 ? 5:29 PM Do You Sometimes Choose to Pay Higher Prices? A s you know, one of the conditions of price discrimination is that the seller be able to distinguish among customers who would be willing to pay different prices. Ask yourself whether people who value their time highly are more willing to pay a higher price for a product than people who do not. Some sellers think so. They argue that people who place a high value on their time want to economize on the shopping time connected with the purchase of the product. If sellers want to price discriminate between these two types of customers—charging more to Page 216 customers who value time more and charging less to customers who value their time less—they must determine the category into which each of their customers falls. How would you go about making this determination if you were a seller? What many sellers do is place cents-off coupons in newspapers and magazines. They think that people who value their time relatively low will spend it clipping and sorting coupons. People who place a relatively high value on their time will not. In effect, the process works in a similar way at your local grocery store. • • • The posted price for all products is the same for all customers. Both Linda and Josh put the cereal in their shopping carts. When Linda goes through the checkout, the clerk asks her if she has any coupons. Linda says Now suppose the seller can only charge one price and wants to sell 3 units of the good. What price will the seller charge? The answer is $6, because only at $6 will 3 units of the good be purchased. (If the seller charges $8, only 2 units will be purchased.) The total revenue for this seller is $18, which is the price of the good ($6) times the quantity bought (3). Now suppose this seller can price discriminate, or charge one price to one buyer and a different price to another buyer. The seller will charge one buyer $10 (because from our table we know that at least one buyer is willing and able to pay $10 for the good—after all, we can see that the quantity 216 Chapter 8 Competition and Markets • no, so Linda pays the posted price. When Josh goes through the checkout, he says he has a coupon for the cereal, and so he ends up paying a lower price than Linda paid. THINK ABOUT IT Do you think that people in their thirties are more or less likely to use coupons than people in their late sixties? Explain your answer. demanded is 1 at a price of $10), and then charge another buyer $8 (because we know that that the price of the good has to be $8 before another person will buy the good). The seller charges a third person $6 (because we know that the price of the good has to be $6 before a third person will buy the good). What is the seller’s total revenue now? It is the sum of $10 and $8 and $6, or $24. In other words, if the seller does not (or cannot) price discriminate, and charges the same price to all customers, total revenue is $18. But if the seller can and does price discriminate, charging different prices to different customers, total revenue increases by $6 to a total of $24. 08 (186-221) EMC Chap 08 11/17/05 5:29 PM Page 217 It would seem, then, that every seller in the world would want to price discriminate. In fact, every seller does want to price discriminate—but not every seller can. Certain conditions must be present. Factors Allowing Price Discrimination First, different customers must be willing and able to pay different prices for a good. In other words, one person is willing and able to pay $10 for the good, but another person is only willing and able to pay $8 for the good. Second, the seller requires a way to tell who is willing to pay $10 and who is only willing to pay $8. (By the way, buyers don’t willingly give up this information.) Third, it has to be impossible, or extremely costly, for the good that is purchased by one customer to be resold to another. For example, suppose the person who bought the good at $6 (in the example earlier) could buy 3 units of the good at this price. Then this buyer could turn around and sell one unit of the good to another buyer for, say, $10, and one unit of the good to still another buyer for $8. Instead of the seller capturing the “$6 a...
View Full Document

Ask a homework question - tutors are online