Price Discrimination Monopoly Wrap-Up Chapter 15 Completion

Single Price Monopoly Monopoly Profit ATC Quantity P 1 Q1Q1 0 Costs and Revenue D MC MR ATC E1E1 Despite a monopoly profit, many consumers still pay less than they are willing to…

PRICE DISCRIMINATION Price discrimination is the business practice of selling the same good at different prices to different customers For a Firm to price discriminate it must: –have some market power (some price control) –be able to identify & separate groups of consumers –be able to prevent resale between consumers

Examples of Price Discrimination Coupons Cell Phone “Calling Plans” AP Exams $55 LATE FEE Grants, discounts for some….

1)Imperfect Price Discrimination –Charging some customers different prices –Qty produced could rise, fall or stay the same 2)Perfect Price Discrimination (also called 1 st Degree) –Each customer charged the maximum price they would pay –Quantity sold = competitive quantity (No DWL) 2 Types of Price Discrimination

It always raises monopolist profits –By charging higher prices to some customers It can lower deadweight loss –Only when market gets “bigger” It can raise, lower or leave Total Welfare unchanged “Imperfect” Price Discrimination

Imperfect Price Discrimination Monopoly Profit ATC Quantity P 1 Q1Q1 0 Costs and Revenue D MC MR ATC E1E1 Charge some customers more than P 1 & profits will rise! Example: raise price but offer coupons to some customers

Perfect Price Discriminating Each Consumer pays the maximum price they are willing! Consumer surplus & DWL are eliminated! Quantity Produced = Competitive Quantity Every consumer is charged a different price so the demand curve becomes the MR curve! Same Qty as perfect competition

Worksheet Price Discrimination

Monopoly Review Quantity 0 Price DWL P > MC D = Market Demand Curve MR MC Competitive quantity Monopoly price Monopoly quantity Allocative Efficiency P = MC EMEM ECEC Competitive Price Competitive firms always produce at Allocative Efficiency which is P = MC Single Price Monopolies set MC = MR so P > MC so DWL exists