1. Monopoly with Price Discrimination Lecture 25
Dr. Jennifer P. Wissink
©2019 Jennifer P. Wissink, all rights reserved.
April 29, 2019

2. Ways the Government Can Regulate Monopolies – DO/KNOW THESE!
How about a per unit tax on the output of the monopolist? What would that do?
How about a per unit subsidy on the output of the monopolist? What would that do?
How about a tax on the economic profit of the monopolist? What would that do?
How about a binding price ceiling on the monopolist? What would that do?
How about breaking up the monopoly? What would that do?
How about taking away the patent? What would that do?

3. Placing a Price Ceiling on the Simple Monopolist
EpiPen CEO To Testify About Price Hikes - mc
PSM
Demand
QSM
mrSM

4. Placing a Per Unit Tax on the Simple Monopolist’s Output – TRY THISmc
PSM
Demand
QSM
mrSM

5. How About 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

6. Three Requirements for 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.

7. 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!

8. 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”

9. i>clicker question
So, for the 1st degree (aka perfectly) discriminating monopolist which one 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

10. 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?

11. 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.

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

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

15. 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