End of Monopoly and onto Monopolistic Competition Lecture 25 Dr. Jennifer P. Wissink ©2018 John M. Abowd and Jennifer P. Wissink, all rights reserved. April 30, 2018

Two Classic Forms of Price Discrimination First Degree Price Discrimination (aka Perfect) Charge a different price for each unit sold. So you march down the demand curve. The most extreme form of price discrimination. Third Degree Price Discrimination Segment market and then charge a different price in each market, same price within the market segment. Exploit the observation that at the simple monopoly price the own price elasticity of demand differs across the defined segmented markets. Price discrimination comes in many other “flavors”

i>clicker question So, for the 1st degree (aka perfectly) discriminating monopolist which is TRUE? Price equals marginal revenue for all values of Q. Price is less than marginal revenue for all Q>0. Price is greater than marginal revenue for all Q>0. When price is falling marginal revenue must be rising. Marginal revenue equals marginal cost for all values of Q. Demand

First Degree (Perfect) Price Discrimination: Conduct and Performance The perfectly discriminating monopolist’s marginal revenue is identical to its market demand curve. Note: The monopolist does not lower the price on all preceding units to sell the next! The monopolist now follows the rules for profit maximization and sets mrfd=mc to get Qfd. The monopolist charges a different price for each unit sold according to the demand curve. mc Demand = mrfd Performance: Is Qfd Pareto/Allocatively Efficient(AE)? All the net social surplus goes to the monopolist as producer’s surplus. Consumers’ surplus = $0! Is Qfd productively efficient (pe)? Is Qfd equitable?

Third Degree Price Discrimination: Conduct and Performance The monopolist separates his market into “segments.” by age by gender by income by zip code by attitudes by anything that will work for him! The monopolist charges a different price to each segment. The monopolist charges the same price on all units sold WITHIN the same segment. This type of discrimination will yield MORE profits than under simple monopoly when the own price elasticities of demand DIFFER across the different segments when you charge everyone the same simple monopoly price.

Third Degree Price Discrimination: Conduct & Performance $ Pa Pk Dkids Dadults mc mc mrkids mradults Qa Qa Qk Qk

Believe It Or Not When: early 1990’s Market: contact lenses Firm: Bausch & Lomb Lenses: Optima @ $70/pair - wash and keep 1 year Medalist @ $15/pair - wash and keep 2 months SeeQuence 2 @ $8/pair - wash and keep 2 weeks Occasions @ $3/pair - daily and disposable each day Guess what?

Believe It Or Not They were all the same lenses! Just packaged differently! What would you pay for a year? Optima = $70/pair - wash and keep 1 year Medalist = $15x6=$90 (last 2 months) SeeQuence 2 = $8x26=$208 (last 2 weeks) Occasions = $3x365 = $1095 What would I do? Buy the Occasions Wash and wear until my eyes hurt. Class action suits were eventually settled.

More Ways To Discriminate Information or Knowledge Local versus tourist Time and/or Flexibility Business versus Leisure New versus Repeat Customer Interesting Read: The adult-book premium http://www.economist.com/blogs/freeexchange/2011/11/price-discrimination THANKS TO Brit G! My favorite.... Examining Differences in Drug Prices http://www.nytimes.com/2000/09/21/business/examining-differences-in-drug-prices.html

Sample Problem Solving Suppose you are given this demand information: Adults: QA = 100 – 2P OR PA = 50 – 1/2Q Kids: QK = 80 – 2P OR PK = 40 – 1/2Q Suppose you are given this cost information: total cost = 15Q, where Q = QA+QK  fc=0 and avc = atc = mc = 15 Find: the simple monopoly solution the 1st degree price discrimination solution the 3rd degree price discrimination solution

The Simple Monopoly Solution Revenue Side: Adults: QA = 100 – 2P OR PA = 50 – 1/2Q Kids: QK = 80 – 2P OR PK = 40 – 1/2Q SM: QSM = 180 - 4P  PSM = 45 - 0.25Q Cost Side: tc = 15Q, where Q = QA+QK  mc=atc=avc=15 mc=atc=avc 15 D mrsm

The Simple Monopoly Solution: QSM=60 and PSM=$30 Adults: QA = 100 – 2P OR PA = 50 – 1/2Q tc = 15Q, where Q = QA+QK  mc=atc=avc=15 Kids: QK = 80 – 2P OR PK = 40 – 1/2Q tc = 15Q, where Q = QA+QK  mc=atc=avc=15 mc=atc=avc mc=atc=avc 15

The First Degree Price Discrimination Monopoly Solution mc=atc=avc mc=atc=avc 15 Adults: QA = 100 – 2P OR PA = 50 – 1/2Q tc = 15Q, where Q = QA+QK  mc=atc=avc=15 Kids: QK = 80 – 2P OR PK = 40 – 1/2Q tc = 15Q, where Q = QA+QK  mc=atc=avc=15