Price Discrimination AP micro 10/26

Warm Up 1. The unregulated, single-price monopoly shown in the figure will sell A. 50 tickets B. 30 tickets C. less than 30 tickets D. 100 tickets 2. An unregulated, single-price monopoly is shown in the figure. If fixed cost is $20, the monopoly’s total costs when it is maximizing its profit will be A. $30 B. $40 C. $140 D. $80

Price Discrimination Up to this point we have considered only the case of a single-price monopolist, one who charges all consumers the same price. As the term suggests, not all monopolists do this. In fact, many if not most monopolists find that they can increase their profits by charging different customers different prices for the same good: they engage in price discrimination.

Price Discrimination By charging each customer in a single market the maximum price he/she is willing to pay, it eliminates all consumer surplus It can either be charging each customer one price for the first set of units purchased and a lower price for subsequent units purchased OR Charging some customers one price and other customers another price

Price Discrimination Example: Airlines—depending on the day, “type of ticket”, age, etc. you pay different prices for the exact same service and type of seat Price Discrimination takes place under monopoly, oligopoly, and monopolistic competition but never under perfect competition https://www.cbsnews.com/news/price-discrimination-gender-gap-cbs-news- undercover-dry-cleaners/

Two Types of Airline Customers Price, cost of ticket By not choosing one price for both business and students, the airline is able to capture all of the consumer surplus as profit Profit from sales to business travelers $550 B Profit from sales to student travelers Figure Caption: Figure 14-10: Two Types of Airline Customers Air Sunshine has two types of customers, business travelers willing to pay at most $550 per ticket and students willing to pay at most $150 per ticket. There are 2,000 of each kind of customer. Air Sunshine has constant marginal cost of $125 per seat. If Air Sunshine could charge these two types of customers different prices, it would maximize its profit by charging business travelers $550 and students $150 per ticket. It would capture all of the consumer surplus as profit. 150 125 MC S D 2,000 4,000 Quantity of tickets

Price Discrimination and Elasticity The more inelastic the demand is (ie. Business travelers) the more the monopoly can charge and get in profit The more elastic the demand is (ie. Student travelers) the less the monopoly can charge and get in profit This is why airfair pricing is cheaper the earlier you book and if you travel on a weekend

Two and Three Different Prices (a) Price Discrimination with Two Different Prices (b) Price Discrimination with Three Different Prices Price, cost Price, cost Profit with two prices Profit with three prices P high P high P medium P low P low MC MC Panel (a) shows a monopolist that charges two different prices; its profit is shown by the shaded area. Panel (b) shows a monopolist that charges three different prices; its profit, too, is shown by the shaded area. It is able to capture more of the consumer surplus and to increase its profit. That is, by increasing the number of different prices charged, the monopolist captures more of the consumer surplus and makes a larger profit. D D Quantity Quantity Sales to consumers with a high willingness to pay Sales to consumers with a low willingness to pay Sales to consumers with a high willingness to pay Sales to consumers with a medium willingness to pay Sales to consumers with a low willingness to pay

Perfect Price Discrimination Perfect price discrimination takes place when a monopolist charges each consumer his or her willingness to pay—the maximum that the consumer is willing to pay which results in the monopolist capturing the entire surplus The greater the number of different prices a monopolist can charge, the closer it can get to perfect price discrimination Perfect price discrimination is also never possible in practice

Perfect Price Discrimination Price, cost Profit with perfect price discrimination MC D Quantity

Regulated Monopolies Usually natural monopolies Socially optimal price allocative efficiency at P=MC=D Fair return price (f) D=ATC Dilemma of regulation

FRQ Practice