![]() A movie theater charging different prices for tickets based on a consumers age.A car dealership negotiating car prices with consumers on an individual basis.A sports team charging different prices for seats in the same section of a stadium.A university charging different students different prices of admission.This is also called intertemporal price discrimination. more expensive the closer you get to the actual flight) or based on your past ticket purchases. Many times the cost varies based on how much in advance the flight is booked (i.e. An airline charging different prices to customers for the same flight.This eliminates consumer surplus and turns that into revenue, which in turn increases the economic profits that are earned by the firm.Įxamples of various situations where monopolies are price discriminating include: A pure monopoly charges a single price, where a price discriminator will charge each consumer at different prices. When a monopoly price discriminates, it earns a higher marginal revenue (MR), so it will increase its output and produce at the allocatively efficient level of output.īy price discriminating, a monopolistic firm will increase its economic profits. A pure monopoly always produces less than a perfectly competitive market, meaning its level of output is not allocatively efficient. When a monopoly price discriminates, it becomes allocatively efficient. The following graph shows profit in a price discriminating monopoly: Total cost is the same as always - the rectangle formed by ATC and the price. Total revenue looks like a trapezoid going down the demand curve, since we make different amounts of revenue per consumer. Thus, we have three main curves on our graph: MC, which stays the same, D = MR, which is downward sloping, and ATC, which also doesn't change. ![]() In perfect price discrimination (also called first degree price discrimination), demand exactly equals marginal revenue because we're able to earn exactly the additional willingness to pay for each additional unit, unlike before. Productively and allocatively inefficientĪllocatively efficient, productively inefficient Take a look at the table below for more information. There are many differences between a regular monopoly and one that price discriminates. Consumers cannot easily re-sell the product in the market - If consumers are able to easily resell the product, they may be able to arbitrage the price difference and undermine the monopoly's ability to price discriminate.The firm must be able to segregate the market - this means being able to find out what each consumer's willingness to pay is.The firm must have monopoly power - you can't price discriminate without power over prices.There are three conditions that need to be present in order for a monopoly to practice price discrimination: If they're willing to pay a little (up to the price where MR = MC), they're charged a little. If a customer is willing to pay a lot, they're charged a lot. The price they are charged is based on their purchasing power and their demand elasticity. Price discrimination is a practice used by monopolies in which specific products are sold to different buyers and each consumer is charged the highest price that they are willing and able to pay. This section will discuss price-discrimination, the process by which a monopolist smashes consumer surplus and charges every consumer a different price - their exact willingness to pay. However, the monopolist doesn't have to uniformly-price (barring laws forcing them to). ![]() Even if the first consumer is willing to pay $50, if the price is $5, they must charge $5. In a monopoly, MR is less than D because a monopoly must charge all consumers the same price, meaning they cannot take advantage of different willingnesses to pay. In a uniformly-pricing monopoly, the monopolist charges only one price - the demand price at the point where MR = MC. A monopoly is a market structure in which the entire market is run by one firm who has complete control over the price and quantity produced. Refresher of a Uniformly Pricing Monopoly
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