Price Discrimination Cartoon

Interview Style.

Hi, my name is Bill Gates, the current

chairman of Microsoft which is the world’s

largest personal computer software company.

Microsoft is an example of a Monopoly and so

is known as a Price Maker because it

dominates the Windows Market.

Monopoly companies often are involved in

Price Discrimination because they have market

power.

Hi Bill, I’m

Jack!What is

Price

Discrimination?

That’s a very good question Jack.

Basically, it is when firms try to

sell the same good to different

customers for different prices

even though the costs of

producing for the two customers

are the same.

But why

would a

monopolist

do this Bill?

Well Jack, they would do this to maximise

profits for the firm.

Remember that Marginal Cost is the

change in total cost that arises when

quantity produced changes by one unit. A

monopolist charges above marginal cost.

They charge the customer a price closer to

his or her willingness to pay.

Think of when a new book is published

such as Harry Potter. At first an expensive

hardback edition is released and

eventually a cheaper paperback one is the

difference in the printing costs between

the two is very little compared to the

difference in price but it is based on the

willingnessof the customer to pay. The

'eager' fans will pay more at first than

those who wait.

But Bill, how do

you know a

customer’s

willingness to pay?

Well Jack, Perfect Price Discrimination is when the

monopolist knows exactly the willingness to pay of

each customer and can charge them a different price

But in reality price discrimination is not always

perfect.

Normally firms divide their customers into groups

based on age, income,nationality.

Below are examples of price discrimination.

Cinemas price discriminate by

offering different prices to children,adults and senior citizens because

they know seniors citizens and children

have a lower willingness to pay. The price of providing the seat is the same for

everyone.

Airlines also price discriminate by

dividing customers into personal and business

travellers. Business travallers have a higher willingness to pay. Also

the time of year will affect the price as

well.e.g at Christmas time prices go up.

When a firm offers a discount the also price discrimiinate. They can

do this by offering coupons or lower

prices to those that buy higher quantities

of a good.

Examples of Price Discrimination

Public Policy Toward Monopolies

Are Monopolies a

good thing? And if not

how can you respond

to them?

Hi Jack! I am Enda Kenny, Head of the Irish

Government and I’m going to be talking about

Public Policy Towards Monopolies.

No they are not because they charge prices above

marginal cost and fail to allocate their resources

efficiently.

Policy Makers in the Government can respond to

this problem in 4 ways:

1.More Competitive

Industry

2.Regualte Behaviour of the

Monopolies

3.Public Ownership

4.Doing Nothing at all

H Jack! I’m Michael O’Leary, the CEO of Ryanair. I am

going to be talking about the first way a government

can respond to a monopoly which is to make the

industry more competitive.

Governments to promote competition in an Industry

will closely examine a proposed merger between two

companies that already have a significant a market

share.

The ECN

National Competition Authorities.

Other National Competition Authorities.

EU Competition Commission.

How and why would a

Government do that?

Well Jack, take for example how, at the moment, I am

trying to take over Aer Lingus. Since Ryanair and Aer

Lingus are two of the biggest competing airlines in the

market the consequences of the merger need to be

closely examined because it could make the market less

competitive!

In Europe each country has their own Competition

Authority. These National Competition Authorities co-

operate with each other and with the Eu Competition

Commission through the ECN( European Competition

Network). Take a look below Jack!

http://www.youtube.com/watch?v=S4rZ_-dKxlw

Ah I see how the ECN

works now! Thanks

Michael!

Take a look at this

video from Financial

News about the

takeover bid!

But how are these

competition laws

enforced Michael?

All National Competition

Legislation has to be in line with

EU Legislation overall.

Cross border cases are dealt

with by EU Law

And what do these

laws cover Michael?

Below is an easy to read

diagram to help you

understand the areas

covered by law.

Against Cartels which prevent

Free Trade.

Monitor and Examine

Acquisitions and Joint Ventures.

To Ban anti-competitive

price strategies such as price fixing.

But remember Jack, mergers

can also be beneficial.

Companies can merge to lower

costs through more efficient

production. These are known as

synergies

I’m backto explain the second

way governments can respond

to a monopoly and that is

through Regulation!

Welcome Back Enda!

How does the

Government do this?

Can you give me

some examples?

Think of Natural Monopolies that

you know such as utility companies

like gas, water and electricity.

We the government regulate their

prices and stop them charging the

price they want!

Oh yeah I

know some

examples!

Yes Jack they are some

examples of utility companies

that the government regulates!

The next question to decide is

how the government should set

a price for a natural monopoly?

And how does the

government set

this price Enda?

Firstly you cannot set the price equal to

the company’s marginal cost because

in general natural monopolies have a

declining average total cost and

marginal cost is less than this so if the

price was set to equal the marginal

cost, the company would lose money!

For a Natural Monopoly

AVERAGE COST > MARGINAL COST

So how does

the regulator

respond to this

price problem?

They can

SUBSIDISE the

monopolist.

But how do they raise

the money to pick up

the losses from this

marginal cost pricing?

They raise money through

TAXATION.

Firms in a Competitive Market benefit

from lower costs because this leads to

higher profits.

However when costs fall for a

monopoly the regulator will reduce

the price so there is no incentive for a

monopoly to lower costs.

Public Ownership of a Monopoly

So far Jack we have looked at two

ways in which a government can

respond to a monopoly. That is by

making the industry more

competitive and by regulation.

And what is the third

way Enda?

Public Ownership

Oh yes I know that this

is called a nationalised

Industry! The

government runs the

monopoly!

Yes Jack! And now that you have

been studying economics, which

do you think is better, private or

public ownership?

Well a private firm would have more

of an incentive to lower costs

because that will mean higher

profits but with public ownership if

they firm loses money the taxpayer

will have to pay the losses!

An excellent point Jack.

Look below for some examples of

Public Owned Companies in

Ireland.

Doing Nothing

The 3 ways to deal with a

monopoly that we have

discussed also have drawbacks.

So the government can also do

nothing and let them regulate

themselves.

Charge prices above marginal cost , causing deadweight

losses.

Inefficiences can be mitigated through Price Discrimination or by Policy Makers like the

Government.

Downward Sloping Demand Curve.

Monopoly power is limited because they cannot raise

prices too much because of substitutes.

Monopoly

Okay Enda so now that we

have discussed a monopoly I

think I can draw some

conclusions about them!

Yes Jack they are all excellent

conclusions about a monopoly. I hope

that you have learned the difference

now between a monopoly and a

competitive firm! I have summarised

them for you below!

Competition

Monopoly

Many Firms

MR=MC

Price=MCPrice

Discrimination not Possible

Cannot earn economic

profits in the long run.

One Firm

MR=MC

Price > MCPrice

Discrimination is Possible

Can earn economice Profit in the

long run.

Thank you so much Enda, Michael, Bill and

Harry! I have learnt a lot about what price

discrimination is and about the behaviour of

monopolies in our society!

I even have now some interesting real life

examples of them and it was great to get insight

from some of the people behind them!