1. Price Discrimination
AP micro 10/26

2. 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

3. 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.

4. 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

5. 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
undercover-dry-cleaners/

6. 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

7. 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

8. 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

9. 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

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

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

12. FRQ Practice