Download krugman ir micro module 30.indd

Module
30
Price Discrimination
Module Objectives
Students will learn in this module:
• The meaning of price discrimination.
• Why price discrimination is so prevalent when producers have market power. Module Outline
I.Price Discrimination Defined
A.Definition: A single-price monopolist offers its product to all consumers at
the same price.
B.Definition: Sellers engage in price discrimination when they charge different
prices to different consumers for the same good.
II. The Logic of Price Discrimination
A.When a single firm sells the same good to two or more different types of customers, it can earn more profit if it is able to charge different prices to each of
the different types of customers.
B.Most monopolists can increase their profits by engaging in price discrimination. This is illustrated in text Figure 30-2, shown next.
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Price Discrimination
(a) Price Discrimination with Two Different Prices
Price,
cost
(b) Price Discrimination with Three Different Prices
Price,
cost
Profit with
two prices
Phigh
Profit with
three prices
Phigh
Pmedium
Plow
Plow
MC = ATC
MC = ATC
D
Sales to
consumers
with a high
willingness
to pay
Sales to
consumers
with a low
willingness
to pay
Quantity
D
Sales to
consumers
with a high
willingness
to pay
Sales to
consumers
with a
medium
willingness
to pay
Sales to
consumers
with a low
willingness
to pay
Quantity
(c) Perfect Price Discrimination
Price,
cost
Profit with perfect
price discrimination
MC = ATC
D
Quantity
III.Price Discrimination and Elasticity
A.If a firm can identify two separate customer groups that have differing price
elasticities of demand, it can engage in price discrimination.
1. A firm with market power will raise price on customers who have inelastic demand and lower price on customers who have elastic demand.
IV.Perfect Price Discrimination
A.Definition: Perfect price discrimination takes place when a monopolist
charges each consumer his or her willingness to pay—the maximum that the
consumer is willing to pay.
B.The greater the number of prices the monopolist charges, the lower the lowest
price; that is, some consumers will pay prices that approach marginal cost.
module 30
price discrimination
C. The greater the number of prices the monopolist charges, the more money it
can extract from consumers.
D.Firms try to achieve perfect price discrimination by
1. Advance purchase restrictions.
2. Volume discounts.
3. Two-part tariffs.
Teaching Tips
Price Discrimination Defined
Creating Student Interest
Ask students how much it costs to see a movie at a theater. The question should prompt
some discussion of the market price. Students will also bring up the fact that different
customers pay different prices (seniors, children, students) and the price is different for
movies shown on different days and/or times (matinees, weekends). You can illustrate
this by showing the prices charged at your local theater.
Presenting the Material
Many students become very interested in examples of price discrimination and the fact
that it is illegal. They will often start asking you about specific examples. Make sure you
emphasize that price discrimination is charging different prices to different customers
for the same product. Many of the examples they bring up appear to be price discrimination, but in fact are not, because the product is actually different. For example, phone
calls and airline flights are different products when they occur at different times or on
different days. A dinner buffet for a child and an adult are different products. Examples
of actual price discrimination include charging men and women different prices for dry
cleaning the same type of shirt, or charging men and women different prices for the
same drink. There are some examples of price discrimination that is allowed (sometimes
firms discriminate in favor of senior citizens, military personnel, or students). There are
also some examples of price discrimination that is illegal, but is not prosecuted. This can
make dealing with student “But what about . . .” questions tricky and potentially entangling and time consuming. Try to harness student interest in the topic without becoming
swamped by the complexity of the real world!
Use the example of airline travel by business and vacation travelers that was described in
previous modules of this instructor’s manual. The price elasticity of demand for business
travelers was calculated to be .54, or very inelastic. The price elasticity of demand for
vacation travelers was 2.33, or very elastic. Airlines have a clear opportunity to practice
price discrimination by raising prices on business travelers, and charging a lower price
for vacation travelers. Use text Figure 30-1 to illustrate the profits from two different groups of customers.
(This is another airline ticket example.)
Case Studies in the Text
Economics in Action
Sales, Factory Outlets, and Ghost Cities—This EIA presents examples of subtle forms of
price discrimination employed by oligopolists and monopolistic competitors.
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Ask students the following questions:
1. Why do stores put goods on sale? (To increase revenues by appealing to
their customers who have high price elasticity of demand.)
2. What two different types of customers is the store catering to? (Customers
who will shop regardless of price and customers who will buy only if the
item is on sale.)
3. Why are outlet stores on the outskirts of towns? (These appeal to customers who are willing to take the time to drive for lower prices; the time
spent driving is an opportunity cost. These customers also have high price
elasticity of demand.)
Two Types of Airline Customers
Price, cost
of ticket
Profit from sales
to business travelers
$550
Profit from sales
to vacation travelers
B
150
125
MC
S
D
2,000
4,000
Quantity of tickets
Activities
Price Discrimination on Campus (5–10 minutes)
Pair students and tell them that they represent the student government on campus. Can
they engage in profitable price discrimination on the following services?
Parking spaces
Theater productions
Sports events
Ask a few pairs to report. Make sure that they were able to determine whether there are
separate groups with differing price elasticities.