1. Monopoly & Price Discrimination
Dr. Jennifer P. Wissink
©2011 John M. Abowd and Jennifer P. Wissink, all rights reserved.

2. Price Discriminating Monopolists
A monopolist might be able to charge different prices for different units sold and enhance its profits.
charge different people different prices
charge the same person different prices for different units
Price Discrimination
charging different prices for different units with no cost basis for the differential in price
charging the same price for different units when there are cost differences

3. Requirements For Successful Price Discrimination
Some amount of monopoly power.
An ability to prevent resale.
Detailed information about who is buying what unit, and what that demander is willing to pay.

4. Believe It Or Not What would you do to prevent resale??? When: 1940’s
Market: plastic molding powder
industrial users: .85/pound
denture manufacturers: $22/pound
Firm: Rohm and Haas
Problem: resale from industrial users to denture manufacturers was reducing profit
Solution: rumor you are mixing arsenic in the powder sold to industrial users!

5. Two Classic Forms Of Price Discrimination
Perfect or First Degree(fd) Price Discrimination
charge a different price for each unit sold
the most extreme form of price discrimination
Third Degree(td) 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”

6. First Degree Price Discrimination: Conduct & Performance
The monopolist charges the demand price for each unit sold.
In this case the market demand curve becomes the monopolist’s marginal revenue curve.
Note: The monopolist does not lower the price on all preceding units to sell the next!

7. Graphical Display Of First Degree Price Discrimination Profit Maximizing Solution
(1) The monopolist sets marginal revenue equal to marginal cost.
Then goes up to the demand curve to get the prices for each unit.
(2) Then makes sure he is at a max (and not a min).
(3) Then makes sure it is worth operating in the short run. $ mc
P last
Demand
= Marginal Revenue
Qfd Q

8. Performance Of First Degree Price Discrimination Profit Maximizing Solution
The first degree discriminating monopoly equilibrium is allocatively (Pareto) efficient.
At Qfd, $MBsoc = $MCsoc
NO Dead-Weight-Loss!
All net social surplus goes to the monopolist.
PS=NSS
CS=0
The First Degree Discriminating equilibrium may or may not be productively efficient. $ B mc
= MCsoc
P last C A
Demand
= Marginal Revenue
= MBsoc
Qfd Q
Qpe

9. Third Degree Price Discrimination: Conduct & Performance
The monopolist separates his market into “segments.”
by age
by gender
by income
by zip code
by attitudes
The monopolist charges a different price to each segment.
The monopolist charges the same price on all units sold WITHIN the same segment.
When will this type of discrimination yield MORE profits than under simple monopoly?

10. Third Degree Price Discrimination: Conduct & Performance$ Pa Ps D D mr mc mc mr Qa Qs Q

11. Price Discrimination in the Movie Theatre Market
Price per ticket
Quantity adult movie tickets
Quantity senior movie tickets
Total Demand for Tickets
Single Price Total Revenue
Single Price Marginal Revenue
Adult Total Revenue
Adult Price Marginal Revenue
Senior Total Revenue
Senior Price Marginal Revenue
Marginal Cost
Single Price Economic Profits
16.00
200
3,200
2.00
2,800
15.50
225 25
250
3,875
13.00
3,488
11.00
388
15.00
3,375 50
300
4,500
12.00
3,750
10.00
750
14.00
3,900
14.50
275 75
350
5,075
3,988
9.00
1,088
4,375
100
400
5,600
4,200
8.00
1,400
4,800
13.50
325
125
450
6,075
4,388
7.00
1,688
5,175
150
500
6,500
4,550
6.00
1,950
5,500
12.50
375
175
550
6,875
4,688
5.00
2,188
5,775
600
7,200
4.00
2,400
6,000
11.50
425
650
7,475
4,888
3.00
2,588
6,175
700
7,700
4,950
2,750
6,300
10.50
475
7,875
4,988
1.00
2,888
6,375
800
8,000
5,000
0.00
3,000
6,400
9.50
525
850
8,075
-1.00
3,088
900
8,100
-2.00
3,150
8.50
575
950
-3.00
3,188
1,000
-4.00
7.50
625
1,050
-5.00
1,100
-6.00
6.50
675
1,150
-7.00
1,200
The best single price in this market is $10/ticket, which makes economic profits of $6,400 (light blue entries). Set marginal cost = marginal revenue with the single price.
The price discriminating monopolist can make more economic profits by charging adults $11 (light red entries) and seniors $9 (light yellow entries). Set marginal cost = marginal revenue separately for each market.

12. Summary Of Price Discrimination Example
Profit Maximum with 2 Prices
Economic profits adult market
4,050
Economic profits senior market
2,450
Total with price discrimination
6,500
Total without price discrimination
6,400
Calculating economic profits separately for the two markets (adult and senior) shows that the total is greater than with the best single price.

13. 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?

14. 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.

15. More Ways To Discriminate
Information or Knowledge
Time
Flexibility
Business versus Leisure
New versus Repeat Customer
Human versus Animal
Local versus Tourist

16. Two Part Tariffs To Discriminate
Consider two cell phone plans
PLAN A:
Monthly fee=$20, no free minutes or free texting, 65¢ per minute
PLAN B:
Monthly fee=$100, 1000 free minutes, unlimited texting, then 45¢ per minute

17. Is It Illegal?
Given as much of it as we see… it can’t be illegal, right?
But…The Robinson-Patman Act is a 1936 statute (15 U.S.C.A. § 13(a–f) that amended Section 2 of the Clayton Act (Oct. 15, 1914, ch. 323, 38 Stat. 730), which was the first antitrust statute aimed at price discrimination. The Robinson-Patman Act prohibits a seller of commodities from selling comparable goods to different buyers at different prices, except in certain circumstances.
A brief bit of history…

18. Is It Bad?
Loaded question….