Monopoly
Price Discrimination
How much would you pay for this? Perfect! That's the price!
1
concept
Price Discrimination
7m
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Alright, So sometimes monopolies can have the power to charge different prices to different customers. Let's discuss that now. So this idea of price discrimination. Okay, so up to this point, we've been talking about a monopolist who charges the same price to all its customers, and that was a single price monopolist. Okay, The same price. You're just charging one price to all your customers. But what if you could charge different prices? Different people, you could probably make more money, Right? So there's this idea of price discrimination. So price discrimination is selling the same good to customers at different price is okay, the same good at different prices. Now, I wanna make a quick distinction. I've had students be confused about this before. Now, price discrimination. This isn't like other forms of discrimination. This isn't like racial discrimination or gender discrimination, right? There. It's not one of these kind of like social issues, right? Price discrimination is just talking about charging different prices to different people based on their willingness to pay. Okay, so just make that quick distinction there. So let's think about how we can how price discrimination can come about. Okay, so there's gonna be these three conditions for price discrimination. First, the firm has to have market power, right? And we said monopolies do have market power, right? So they must be a monopolist or possess the ability to control, you know, quantity and price, right? They have to have some sort of uh market power to to control those those variables. Okay, next, they have to be able to segregate the market. Okay, so there they have to be able to segregate the market into distinct groups. They have to be able to say, okay, these these payers, these customers over here would pay this amount. Uh These customers over here might pay this amount, so they have to be able to uh you know, classify their customers into different groups. Okay? And these different groups are gonna be based on their willingness to pay, okay? The different willingness to pay of each group. Okay. We'll have an example. So you can see how this, how this makes sense. And the last condition is that there's no resale, right? It wouldn't make sense for us to be able to price discriminate and sell someone a lower price of the same product. If they could sell it again, right? If they could go ahead, buy the product, and then just go go ahead and flip it to the other people, right? They're gonna steal the profit from you, that you could have made yourself. So it has to be something that the customers cannot resell. Okay, And we're gonna see some examples of price discrimination uh that actually occurred in the real world. But first, let's talk about this example right here. Okay? Um So we've got this company, macro Soft that sells its computer software to two groups of buyers, right? The small businesses and students. So you can imagine that students are going to be more price conscious, right? The students are gonna be price conscious, and thus they're going to have a more elastic demand, they're not gonna be willing to pay the same price that a small business owner might. Okay, and for simplicity, let's just assume that the average total cost is constant, that no matter how many people they serve, the average total cost is the same. Okay, that's that shouldn't make a difference here, it's just so we can analyze what happens in these markets. Okay, So the monopolist is going to be able to increase its profit by charging a higher price to small businesses and a lower price to customers. Okay, So notice what happens here, look on the left hand graph, we have the small businesses, and on the right hand, the students, right? So we've got the demand of the small businesses, and notice that there's this much more elastic right there, they're gonna need this software no matter what, and there's more elastic. So we've got this marginal revenue curve, and the marginal cost is constant down there, right? So we've got this marginal revenue and marginal cost right here, right, We find where we're going to produce, and then we go up and we charge this price way up here, right, we're gonna charge this price, we go up to the demand curve to find the price, and in this case, since we kept our average total cost constant, um It just makes it easier to just illustrate this profit right here? So this is the price for small business, right? I'm gonna put P. For S. B. For small business, right? And we're gonna supply this quantity right here, this is the quantity for small business, right? So we could imagine that there's some sort of license or some kind of key code that you have to enter to use this software, right? So a student couldn't go and buy the Student edition and give it to the small business, right? There would be some sort of some sort of reason why the small business can't use the student edition, right? There's gonna be some sort of blockade there. So what we see is that this green area that's that we have labeled here, that's our economic profit, right? Everything from the price to the average total cost. So this is the profit that they're getting from the small businesses, but notice we've also got another market, right? So they're selling the same product, but now to students, and now see the students have a much more elastic demand curve, that blue line, see how shallow the curve is. Um So it's much more elastic, they're not willing to pay those high prices that small businesses are willing to pay. Right? The idea here is the students might say, hey, I'm not going to use this product, I'll go and buy a separate office product to use instead. Okay, so um what we see here is now the company, it behooves them to split the market into these two sectors, because if they charge um the students this price right here, this lower price where their marginal revenue and marginal cost curves uh meet right at this quantity right here is where they meet. This is the quantity for students. I'm putting S for students. I guess I'll put S. T. Because I don't want to get confused with supply, quantity supply. So that's the quantity for students. And the price for students, right? Notice how their price is much lower than the price to small businesses. But the the the monopolist is still able to profit right? Because they're still producing a smaller output than the the point where the demand and the marginal cost curve would would cross would be the efficient point. So we're limiting that output to create some profit and increase the price a little bit. Okay, so we see that by splitting the market into these two sections, the firm was able to increase its profit. Right? Imagine if they had charged the small business price to everybody, right? If they had just one price, this small business price, well, they would still get that profit from the small businesses, but they wouldn't get anything from the students, right? The students would no longer purchase that price is too high for the students. Now, what if they charge the student price that everybody, if they charge a student price to everybody, we would be way out here on the demand curve, right? And we would be selling more quantity, but we would lose a lot of our profit, right? We would lose a lot of that profit that we're getting by charging the small businesses high prices, Right? So by charging two different prices to the two customer groups, they're able to increase their total profit. Alright, So this is the idea of being able to split them up into two groups. Ok, now we're going to talk about in the in the following video. Perfect price discrimination. Okay. Where we're able to split it up even more um per customer? Okay, So let's go ahead and do that in the next video?
2
concept
Perfect Price Discrimination
6m
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Alright. So here, we're gonna discuss the idea of perfect price discrimination. This is where we're gonna charge every customer their maximum willingness to pay. Okay, It's pretty tough to do this in real life. Um, but there are actually some cool examples of this actually occurring. Um, So, let's, let's think about this, the idea that we're gonna charge every customer the maximum willingness to pay. How much are you willing to pay for this? That's what we're gonna charge you. How much are you willing to pay for this? That's what we're gonna charge you, Right? So, they're gonna get every, every little bit of profit. So let's check this out. Um, on the left, we've got that single price monopoly, They're charging one price to everybody, right? So, if they're charging one price to everybody, well, we're gonna have this going on right here, right? They're gonna produce where marginal revenue equals marginal cost. And this will be the quantity produced right down here, The quantity for the monopoly, right? And what's gonna be the price? Well, the price is gonna be up here at the demand curve, right? This is gonna be the price of the monopoly. Let me give you a little more space, price for the monopoly, right? And where's our profit? So, our profit is gonna be, remember, we're keeping that average total cost, uh, constant there. It's just gonna make this easier to, to show. So our profit is gonna be everything, uh, from price to average total cost, which is our marginal cost curve for this example, um, our profit is gonna be in there, right? So our profit is here. And what is the rest of this can't really see that. Let me write it over here profit. Right? And that's that whole green area. But what about this area up here? You did a little better there. Okay. This area up here that I just put in purple. Well that's still consumer surplus, right? That's everything above the price. Um But below the demand curve. So I'm gonna put C. S. For consumer surplus in there. And what about everything to the right there? So notice a perfectly competitive market would have produced out here, right? This would have been the perfectly competitive quantity where the marginal cost equals the price, right? So this would have been the quantity and perfect competition which is the efficient quantity. But in monopolies, they restrict that. Right? So what do you think this area is gonna be? Right here? So what's that blue area? Well, that's gonna be our dead weight loss, right? This is the deadweight loss from the trades that didn't occur. That should have occurred. Right? The benefits to the consumers was more than the cost to the producer. It should have been, it should have been a trade that was made. Okay, So now let's think about perfect price discrimination. Now, we're in a situation where we can charge every customer what they want to pay. Let's say this is $20 up here, the maximum that any customer will pay. And this is like five bucks, let's say, right so that first customer, the one who's willing to pay 20 bucks, we're gonna charge him 20 bucks, right? And it's only gonna cost us five. We're gonna make 15 bucks off of him. How about the next guy who's willing to pay? 1999? We're gonna charge in 1999 1998. Everybody's gonna get charged that maximum willingness to pay and we're gonna be left with everything here being profit. So now notice we're actually going to produce all the way up to that final efficient quantity. So technically in this perfectly price discriminating um situation, everything is profit. But that means we got rid of our dead weight loss, right? There's no dead weight loss over here. No deadweight loss. D. W. L. No dead weight loss. So we were able to get efficient when we talked about efficiency in perfect competition. I mentioned that there was a situation where we could be efficient in a monopoly and this is it right here. This is it when we're perfectly price discriminating we get rid of the dead weight loss, right? Because we can even charge this person over here who is only willing to pay $5.01. We're gonna charge them $5.01. And we're gonna make that penny profit right all the way up to that final unit. So that that is the only case where we're gonna be efficient is where we've got this perfect price discrimination. Okay. And again, this honestly doesn't really occur in the real world. But a good example is the use of google adwords. So what google does is effectively they have their their ad ads that go based on the keywords that people type into their search engine, Right? So what google does is they sell these words like a common word, like tutoring, right? If you wanted to look up tutoring and you type it in the internet, the results that show up and the ads that show up at the top are based on who paid for that. And what's gonna happen is google basically auctions it off to the highest bidder, right? So everyone's gonna be bidding until they reach their maximum willingness to pay, right? So everyone's gonna be bidding for this word. Um So it's the person who's willing to pay the most for that word, right? Whoever wants to pay the most for tutoring, they're going to get the best ad on tutoring, right? So everyone, for every word, they're gonna be charging everyone the maximum they're willing to pay based on this system that they get to see who, who should be the one that gets the word right? And it's efficient because it ends up going to the person who wants it the most right? The person willing to pay the most is essentially the person who wants it the most. So that's in essence an efficient outcome, right? But of course, there's there's something to be said about this, right? The consumer surplus is gone. There's something ethical going on with the perfect price discrimination, right? So that's about it here. Let's go on in the next video, let's talk about some real world examples of price discrimination. Okay, let's do that now.
3
example
Price Discrimination
4m
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Alright, so let's just quickly discuss some real world examples of price discrimination. 1st 1 here, movie tickets, right? We see that there's different pricing for an adult and for a child, right? Child might be more elastic. They don't have as much money to go to the movies, right? They have to get the money from the parents. So they find that charging the Children a lower price allows them to increase their profit. Also matinee pricing, right? There's off times, there's like the early afternoons or sunday, right? The days when they're not so hot and packed. Well, they charge a different price to get people to come in at those off hours. Right? So that's an example. Their airline tickets. We'll see this is a great example is where um airline companies tend to charge business travelers a higher price because business travelers are low less elastic, right? They need to go on this trip, They need to go wherever they're going to have this meeting. So they're much much less elastic with their demand for the airline ticket compared to a vacationer. So vacationer might see the price for the ticket and be like, you know what, I'm not gonna go there. Let me check somewhere else. Maybe I can find a cheaper ticket. Right? So they need to offer lower prices to the vacationers than they offer to the business travelers. But one thing they do to lock in those vacationers at the low price is offering them nonrefundable tickets, right? So those low price tickets, they can't resell them to to a business traveler or something, right? They can't exchange them or anything. They can't get a refund. So they offer this lower price with these conditions. How about college tuition? This is a really interesting one. So college tuition, what what ends up happening is colleges like we see all the time in the news, right? Rising tuition costs, tuition costs are crazy. Student debt is enormous, Right? Well, what ends up happening is that there's these really high prices for college? And these high prices are usually um what get paid by like middle class and upper class people end up having to pay these full tuition, right? Because they don't qualify, qualify for financial aid, Right? So what they're doing is they're they're breaking up the group into these rich students that can pay the full tuition and then they offer financial aid to be able to let poorer students also pay to go to college, but they pay a lower amount. Right? So this is another really interesting uh ethical example of price discrimination there, where there's the high tuition for students who don't quite for a day and then there's the lower tuition with aid. Cool. Alright, quantity discounts. So, this is an interesting one. To where, where a company might offer a lower price if you buy a second unit, right? Buy one, get 1 50% off or something like that. They're trying to take advantage of your diminishing returns, right? Maybe when you buy the first slice of pizza, you're really hungry and you really want it. But that second slice doesn't hit you just as strong as the first slice does. So they might offer you buy one slice and the second slices half off or something like that to try and capture a little more of your money, right? So they're discriminating on that second slice. What they're gonna charge you? Pretty cool about discount coupons. So the grow Grocery store every week sends out coupons with 50 cents off of this box of cereal. This and that this is another price discrimination because there's a lot of people who don't want to waste their time clipping the coupons, right? They're not going to go through and clip all the coupons to get the best deal and they're going to pay a higher price. But then they know that there is people that there there are people who would who would put in the effort to clip the coupons for the discount, right? So they know that those people who clip coupons have a lower willingness to pay. So they offer them those discounts through the coupon and effectively charge higher prices to people who don't clip coupons, right? And like we saw in our example that that computer software right? Having a student edition versus professional edition having two different editions that they can sell at different prices, right? To the different consumers. Cool. So that's some real world examples there, let's do a little bit of practice with price discrimination before we move on to the next topic. Cool, Let's do that now.
4
Problem
ProblemIf the firm’s marginal cost is constant at $3.00, output for a perfect price discriminating monopolist is:
A
2 units
B
3 units
C
4 units
D
5 units
5
Problem
ProblemThe marginal revenue for the perfectly price discriminating monopolist from the sale of the third unit is:
A
$6
B
$5
C
$4
D
$3
6
Problem
ProblemThe total revenue for the perfectly price discriminating monopolist from selling five units of output is:
A
$5
B
$15
C
$18
D
$25
7
Problem
ProblemIf the firm’s marginal cost is constant at $3.00, the perfect price discriminating firm will charge each customer:
A
$3
B
$5
C
$8
D
A different price