1. End of Monopoly Lecture 24
Dr. Jennifer P. Wissink
©2017 John M. Abowd and Jennifer P. Wissink, all rights reserved.
May 1, 2017

3. 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.

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

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

6. 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 and wash and wear until my eyes hurt.
Class action suits were eventually settled.

7. 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
THANKS TO Brit G!
My favorite....
Examining Differences in Drug Prices

8. 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

9. The Simple Monopoly Solution
Adults: QA = 100 – 2P OR PA = 50 – 1/2Q
Kids: QK = 80 – 2P OR PK = 40 – 1/2Q
SM: QSM = P  PSM = Q
tc = 15Q, where Q = QA+QK  mc=atc=avc=15 mc 15 D
mrsm

10. 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 mc 15

11. The First Degree Price Discrimination Monopoly Solution
Demand: Q = P  P = Q
tc = 15Q, where Q = QA+QK  mc=atc=avc=15 mc
D = mr FD

12. The First Degree Price Discrimination Monopoly Solutionmc 15 mc
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

13. Third Degree Price Discrimination
Adults: QA = 100 – 2P OR PA = 50 – 1/2Q
tc = 15Q, where Q = QA+QK  mc=15
Kids: QK = 80 – 2P OR PK = 40 – 1/2Q
tc = 15Q, where Q = QA+QK  mc=15

14. Summary: Sample Problem SolvingPA PK QA QK
QTot
profit
$NSS
$PS
$CS
simple monopoly
$30 40 20 60
$900
$1400
$500
1st degree PD
70 different, last=$15
50 different, last=$15 70 50
120
$1850 $0
3rd degree PD
$32.50
$27.50 35 25
$925 $
$462.50

15. Using Multiple Two Part Tariffs to Price Discriminate
Suppose two types of cell phone users: identical old ladies and identical college kids
Assume college kids get loads more surplus from using their minutes than old ladies do.
Consider cell phone plans
Perfect/1st degree price discrimination via a multiple two-part tariff pricing scheme
Set monthly fee to college kids = $FeeCK = $CSCK.
Set monthly fee for old ladies = $FeeOL=$CSOL.
Note: $FeeCK > $FeeOL
Now set one common price/per minute = $P.
Best case scenario for monopolist.
Would be equivalent to perfect/1st degree price discrimination, but a heck of a lot easier to implement.
But... will it work?

16. Using Multiple Two Part Tariffs to Price Discriminate
But....Perfect Price Discrimination FAILS.
College kids will want to “pretend” they are old ladies.

17. Using Multiple Two Part Tariffs to Price Discriminate
IMperfect Price Discrimination with two two-part tariff pricing schemes PLAN A: Monthly Fee=$20, and then you pay 25¢ per minute PLAN B: Monthly Fee=$100, and then you pay 5¢ per minute
Can get a “separating equilibrium” with “self selection”.
$ amount you pay
Plan A: slope=$.25
Plan B: slope=$.05
$100
$20
# minutes

18. Moving On… Monopolistic Competition: Structure
Several firms in the market.
Firms produce differentiated products.
“Free” entry and exit.
Full and symmetric information.
Re: Differentiated Products
Actual: taste, color, location, service, etc.
Perceived: lei jeans vs. Wranglers!
Intellectual “Parents”
Joan Robinson (economist at Cambridge in the U.K.)
Edward Chamberlin (economist at Harvard in Cambridge, MA)
Both pioneered the work on monopolistic competition in the early 1930’s.
“The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.”

19. Monopolistic Competition: Short Run Conduct
Looks and acts just like a mini-simple-monopolist.
srmc $
sratc
PMC
atcMC
demand for GV Jeans q
qMC mr

20. Monopolistic Competition: Long Run Conduct
Free entry will force firm long run economic profits to zero.
So at qmc need:
1) profit max and
2) zero profit and
3) a downward sloping firm demand and corresponding marginal revenue.
 Firm’s demand curve will be tangent to its long run average total cost curve. $
lratc
lrmc
PMC
demand for GV jeans q
qMC mr

21. Monopolistic Competition: Performance (Efficiency & Equity)
i>clicker question Is the monopolistically competitive firm Pareto/Allocatively Efficient? A. Yes. B. No. C. Maybe so
i>clicker question Is the monopolistically competitive firm productively efficient? A. Yes. B. No. C. Maybe so