1. © 2005 Pearson Education Canada Inc. 14.1 Chapter 14 Price Discrimination and Monopoly Practices

2. © 2005 Pearson Education Canada Inc. 14.2 Figure 14.1 The simple monopoly problem

3. © 2005 Pearson Education Canada Inc. 14.3 Price Discrimination and Market Segmentation  All price discrimination schemes share an underlying strategy to segment the market and to charge each segment a different price relative to its cost.  The monopolist’s goal is to turn consumer surplus into revenue.

4. © 2005 Pearson Education Canada Inc. 14.4 Price Discrimination Categories of price discrimination : 1. Perfect Price discrimination-successfully extracting the maximum possible profit from each customer and therefore the whole market. 2. Ordinary Price Discrimination-identification of potential customer groups, charging each group a separate price. 3. Multipart Pricing-charging different rates for different amounts (blocks) of a good or service.

5. © 2005 Pearson Education Canada Inc. 14.5 Figure 14.2 The perfect price- discriminating monopolist

6. © 2005 Pearson Education Canada Inc. 14.6 Price Discrimination  To maximize revenue from the sale of a fixed quantity of output, allocate output so that marginal revenue is identical in all markets.

7. © 2005 Pearson Education Canada Inc. 14.7 Figure 14.3 Price discrimination: equality of marginal revenue

8. © 2005 Pearson Education Canada Inc. 14.8 Price Discrimination  A profit maximizing monopolist engaging in ordinary price discrimination will choose an aggregate output where (aggregate)MR=MC.  Output is allocated so MR is the same in all market segments.  Price is higher in the market segment with the lower price elasticity of demand.

9. © 2005 Pearson Education Canada Inc. 14.9 Figure 14.4 Price discrimination: profit maximization

10. © 2005 Pearson Education Canada Inc. 14.10 Price Discrimination  Criteria For Price Discrimination: 1. The market must be able to identify different price elasticities of demand and segment the market accordingly. 2. Re-sale must not be possible or cost effective in order to prevent arbitrage (profitable re-selling).

11. © 2005 Pearson Education Canada Inc. 14.11 Price Discrimination  Methods of market segmentation: - Direct identification (seniors must show ID to get discounts). -Self selection (advance booking on airlines, stay a Saturday night). -Intertemporal-charging higher prices when the good is first introduced and reducing prices through time.

12. © 2005 Pearson Education Canada Inc. 14.12 Figure 14.6 Multipart pricing

13. © 2005 Pearson Education Canada Inc. 14.13 Figure 14.7 Discriminatory hiring to minimize costs

14. © 2005 Pearson Education Canada Inc. 14.14 Monopsonistic Price Discrimination  A profit maximizing monopsonist will choose aggregate quantity of inputs so that aggregate marginal factor cost (MFC) equals marginal revenue product (MRP).  Purchases will be allocated so that MFC is identical in all input markets.

15. © 2005 Pearson Education Canada Inc. 14.15 Figure 14.8 Discriminatory hiring to maximize profit

16. © 2005 Pearson Education Canada Inc. 14.16 Figure 14.9 Two-part tariff pricing

17. © 2005 Pearson Education Canada Inc. 14.17 Tie-In Sales  Tie-in sales are another way for a monopolist to extract surplus from its customers.  A tie-in sale occurs when a firm has monopoly over some good X, but refuses to sell it unless you also buy good Y, which is available in a competitive market.  With a tie-in sale, the firm lowers the price of a monopoly good and raises the price of the tied good

18. © 2005 Pearson Education Canada Inc. 14.18 Figure14.10 Tie-in sales

19. © 2005 Pearson Education Canada Inc. 14.19 All-or-Nothing Demands and the Exploitation Effect  An ordinary demand curve shows the marginal value of a given quantity.  An all-or-nothing demand curve shows the average value of a given quantity.  When a consumer pays the average value for a good, rather than the marginal value, then the consumer surplus is zero.

20. © 2005 Pearson Education Canada Inc. 14.20 Figure 14.11 All-or-nothing demand curve

21. © 2005 Pearson Education Canada Inc. 14.21 Figure 14.12 The exploitation of affection