Price Discrimination Homework: Monopoly Micro Packet—Due Thursday

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Presentation transcript:

Price Discrimination Homework: Monopoly Micro Packet—Due Thursday Unit 1 Test: Thursday Review Terms??? Price Discrimination Students will examine the individual motivations and interest of 1st degree price discriminators in our contemporary economy from multiple perspectives. Students will explicitly assess price discrimination graphically in order to draw conclusions as to the “theoretical” social responsibility.

3-Minute Case Study: “How Advertisers Can Use Your Personal Information to Make you Pay Higher Prices” & “Why Some People Pay More Than Others When Shopping Online” How would a businessman/woman react to these articles? How would the average consumer react to these articles? Are the actions being taken by these firms socially responsible?

Price discrimination as a tool for social benefits/allocative efficiency? Consider the following… Doctor’s Office services 4 patients: 3 value the treatment at $5, while the 4th, and rich, patient values treatment at $8 Doctor’s Offices FC are $5 and MC of treating 1 patient is $4 If one uniform price of $5 is charged, all patients will receive treatment; however, TR<TC (TR = $20 and TC = $21 = 16 + 5) The Doctor will not offer treatment!!! But, if price discrimination is possible, all patients will pay based on their willingness to pay… TR = $23 ($8 + $5 + $5 + $5) and TC = $21  Doctor will treat all patients and stay in business!

1st Degree Price Discrimination Before Discrimination: 3 Criteria for 1st Degree: Market power: Be the sole supplier of a good, directly controlling price Ability to segregate market based on willingness to pay: recognize and go after different price elasticities of demand of consumers Buyers cannot resell good Price Discrimination = firm with market power who charges different prices for identical goods

1st Degree Price Discrimination Illustrated Price discriminating monopolies are like Pac-man….

1st Degree Price Discrimination Illustrated Price discriminating monopolies are like Pac-man….they eat up consumer surplus!

1st Degree Price Discrimination Illustrated Price discriminating monopolies are like Pac-man….they eat up consumer surplus!

1st Degree Price Discrimination Illustrated By charging any and all prices above the price indicated by the profit maximizing quantities price, consumer surplus is eliminated… All willing buyers have made transactions! Price discriminating monopolies are like Pac-man….they eat up consumer surplus!

1st Degree Price Discrimination Illustrated: Key Concepts Wait?!? Isn’t that new P/Q combination also the socially optimal P/Q (MC = P)??? It sure is! Our price discriminating monopoly is now allocatively efficient. 1. When monopoly can make each consumer pay exactly their WTP the marginal revenue function of the firm changes….MR = D = AR = P. When MR changes, so does profit maximizing quantity (MR =MC rule)! Q

1st Degree Price Discrimination Illustrated: Key Concepts So, profits have increased… the monopolist is happy. But, quantity has increased… and so is the consumer. 2. When monopoly can make each consumer pay exactly their WTP the firm generates the highest possible total revenue. Consumer surplus becomes revenue

Conclusion: 2-Minute Paper On the back of your “Side-by-Side” sheet answer the following prompt: Considering all you have learned, is price discrimination a socially responsible practice?