€£$¥ Understanding Economics, © Richard Delaney, 2008, Edco Discriminating Monopoly
€£$¥ Understanding Economics, © Richard Delaney, 2008, Edco Discriminating Monopoly 2 Price Discrimination Price discrimination takes place when a firm sells the same product to two or more different markets at different prices and the price difference is not related to differences in cost in these markets. Or The same product is sold on different markets at different ratios of MC:P.
€£$¥ Understanding Economics, © Richard Delaney, 2008, Edco Discriminating Monopoly 3 Forms of Price Discrimination First Degree Price Discrimination This is aimed at eliminating consumer surplus in order to get the maximum revenue from each individual. It succeeds only when the seller knows the maximum price each customer is willing to pay rather than do without the product.
€£$¥ Understanding Economics, © Richard Delaney, 2008, Edco Discriminating Monopoly 4 Forms of Price Discrimination Second Degree Price Discrimination This is where price concessions are offered for bulk purchase. It is aimed at selling as large a quantity of the good as possible. For example: 1 for €5, 10 for €40
€£$¥ Understanding Economics, © Richard Delaney, 2008, Edco Discriminating Monopoly 5 Forms of Price Discrimination Third Degree Price Discrimination This occurs when the firm can divide its market into segments based on their PED. This is aimed at widening the market to as many people as is possible. For example: Student fares €40; business travellers €200
€£$¥ Understanding Economics, © Richard Delaney, 2008, Edco Discriminating Monopoly 6 Conditions Necessary to Practise Price Discrimination Essential Conditions 1.The firm must have some degree of monopoly power. 2.The markets must be separate from each other. 3.Consumers must have different price elasticities of demand. Desirable Conditions 4.Consumer Ignorance: They may not be aware that the product is available elsewhere at a lower price. 5.Consumer Indifference / Inertia: The price difference may be so small as not to concern the consumer.
€£$¥ Understanding Economics, © Richard Delaney, 2008, Edco Discriminating Monopoly 7 Discriminating Monopolist: Model 1 It produces 100 units. MR = MC and MC > MR after that. The price (AR) it receives is €10. It now finds a second market and so it will have a second set of revenue curves. It can now produce an extra 80 units, as MR2 now equals MC at 180. It will sell the extra 80 on the second market at €12 each. AR MR AC MC Price Quantity 100 €10 AR2 MR2 This is a monopolist selling to a single market. €12 180
€£$¥ Understanding Economics, © Richard Delaney, 2008, Edco Discriminating Monopoly 8 MC MR(D) AR(D) AR = MR(F) €7 100 €5 €5 250 Price Quantity MC Discriminating Monopolist: Model 2 The domestic monopoly market is represented by the normal downward sloping revenue curves, AR(D) and MR(D). The foreign market is represented by the typical perfect competition AR(F) and MR(F) curve parallel to the quantity axis. The same cost structure applies to both markets, therefore, there is only one MC curve. MR(D) > MR(F) for any quantity from 1 to 100; at 100 units MR(D) = MC giving maximum profit on the domestic market. The price, AR(D), it receives for each unit is €7. After 100 units MR(F) > MR(D) so any extra production will be supplied to the foreign market. At a quantity of 250 – that is, for the extra 150 units – MR(F) = MC, giving the firm maximum profit on that market. The price on that market is €5 – the perfectly competitive market price. Therefore, the full equilibrium is: 100 €7 each supplied on the domestic market 150 €5 each supplied on the foreign market MR(D) = MR(F) = MC
€£$¥ Understanding Economics, © Richard Delaney, 2008, Edco Discriminating Monopoly 9 Discriminating Monopolist: Model 2 (cont.) When the AC curve is superimposed onto this diagram it shows the firm earns SNPs on the domestic market and NPs on the foreign market. The AC on the domestic market is €6.50. The AR is €7, therefore SNPs are being earned. AR and AC are equal to each other, at €5, on the foreign market, therefore NPs are being earned. AC €6.50 MC MR(D) AR(D) €7 100 €5 €5 250 Price Quantity MC
€£$¥ Understanding Economics, © Richard Delaney, 2008, Edco Discriminating Monopoly 10