1. Monopoly & Price Discrimination
Hall & Lieberman, Chapter 9

2. Price Discrimination Single-price monopoly
Firm that is limited to changing same price for each unit of output sold
Price discrimination occurs when a firm charges different prices to different customers for reasons other than differences in costs
Price-discriminating monopoly does not discriminate based on prejudice, stereotypes, or ill-will toward any person or group
Rather, it divides its customers into different categories based on their willingness to pay for good

3. Requirements for Price Discrimination
Although every firm would like to practice price discrimination, not all of them can
To successfully price discriminate, three conditions must be satisfied
Must be a downward-sloping demand curve for the firm’s output
Firm must be able to identify consumers willing to pay more
Firm must be able to prevent low-price customers from reselling to high-price customers

4. Price Discrimination That Harms Consumers
Price discrimination always benefits owners of a firm
Can use this ability to increase its profit
When price discrimination raises price for some consumer above price they would pay under a single-price policy it harms consumers
Additional profit for the firm is equal to monetary loss of consumers

5. Figure 8a: Price Discrimination
Number of Round-trip Tickets
Dollars per Ticket MC E
ATC
$120 80 MR D 30

6. Figure 8b: Price Discrimination
Dollars per Ticket
Additional profit from price discrimination MC
$160
120 MR D
Number of Round-trip Tickets 10 30

7. Figure 8c: Price Discrimination
Dollars per Ticket MC
Additional profit from price discrimination
$120 F G
100 H MR D
Number of Round-trip Tickets 30 30

8. Price Discrimination That Benefits Consumers
Price discrimination benefits monopoly at the same time it benefits a group of consumers
Since no one’s price is raised, no one is harmed by this policy
When price discrimination lowers price for some consumers below what they would pay under a single-price policy, it benefits consumers as well as firm

9. Perfect Price Discrimination
Suppose a firm could somehow find out maximum price customers would be willing to pay for each unit of output it sells
It could increase profits even further by practicing perfect price discrimination
Firm charges each customer the most the customer would be willing to pay for each unit he or she buys
Increases profit at expense of consumers
Perfect price discrimination is very difficult to practice in the real world
Would require firm to read its customers’ minds
Marginal revenue is equal to price of additional unit sold
Firm’s MR curve is same as its demand curve

10. Figure 9: Perfect Price Discrimination
Number of Dolls per Day
Dollars per Doll E 20
$30 25 10 30 60 J B
MC = ATC H D MR
MR curve before price discrimination

11. The Decline of Monopoly?
Past century was not kind to monopolies
Today, monopolies face a different threat
Relentless advance of technology
The world of monopolies is changing rapidly
But monopolies in many forms will be with us for some time

12. Using the Theory: Price Discrimination at Colleges and Universities
Most colleges and universities give some kind of financial aid to a large proportion of their students
Financial aid has been used as an effective method of price discrimination
Designed to increase revenue of the college
Colleges have long been in an especially good position to benefit from price discrimination, because they satisfy all three requirements
Face downward-sloping demand curves
Able to identify consumers willing to pay more
Able to prevent low-price customers from reselling to high-price customers

13. Using the Theory: Price Discrimination at Colleges and Universities
Most colleges have been active price discriminators for decades
Under newer systems, those who can signal a lower willingness to pay have benefited from reduced prices
While those signaling greater willingness to pay have suffered a price increase
Result is vastly different prices for different students
Highly correlated to their families’ willingness to pay
Increased price discrimination at colleges, like so many other economic issues, is a matter of tradeoffs