1. 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

2. 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”

3. 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

4. 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?

5. 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.

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

7. 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?

8. 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.

9. 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

10. 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

11. 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 = P  PSM = Q
Cost Side: tc = 15Q, where Q = QA+QK  mc=atc=avc=15
mc=atc=avc 15 D
mrsm

12. 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

13. 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