Eaton Micro 6e Ch14

7/27/2019 Eaton Micro 6e Ch14

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2005 Pearson Education Canada Inc .14.1

Chapter 14

Price Discrimination andMonopoly Practices


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Figure 14.1 The simple monopoly problem


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Price Discrimination andMarket Segmentation

All price discrimination schemesshare an underlying strategy tosegment the market and to chargeeach segment a different pricerelative to its cost.The monopolists goal is to turnconsumer surplus into revenue.


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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 aseparate price.

3. Multipart Pricing -charging different rates for differentamounts (blocks) of a good or service.


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Figure 14.2 The perfect price-discriminating monopolist


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To maximize revenue from the saleof a fixed quantity of output, allocateoutput so that marginal revenue isidentical in all markets.


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Figure 14.3 Price discrimination:equality of marginal revenue


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A profit maximizing monopolist engagingin ordinary price discrimination willchoose an aggregate output where(aggregate)MR=MC.Output is allocated so MR is the same inall market segments.Price is higher in the market segmentwith the lower price elasticity of demand.


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Figure 14.4 Price discrimination:profit maximization


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Criteria For Price Discrimination:1. The market must be able to identify

different price elasticities of demand and segment the marketaccordingly.

2. Re-sale must not be possible orcost effective in order to preventarbitrage (profitable re-selling).


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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 andreducing prices through time.


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Figure 14.6 Multipart pricing


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Figure 14.7 Discriminatory hiring to minimize costs


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Monopsonistic Price Discrimination

A profit maximizing monopsonist willchoose aggregate quantity of inputsso that aggregate marginal factorcost (MFC) equals marginal revenueproduct (MRP).Purchases will be allocated so thatMFC is identical in all input markets.


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Figure 14.8 Discriminatory hiringto maximize profit


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Figure 14.9 Two-part tariff pricing


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Tie-In Sales

Tie-in sales are another way for a monopolist toextract surplus from its customers.A tie-in sale occurs when a firm has monopoly

over some good X, but refuses to sell it unlessyou also buy good Y, which is available in acompetitive market.With a tie-in sale, the firm lowers the price of amonopoly good and raises the price of the tiedgood


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Figure14.10 Tie-in sales


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All-or-Nothing Demands and theExploitation Effect

An ordinary demand curve shows themarginal value of a given quantity.An all-or-nothing demand curveshows the average value of a givenquantity.When a consumer pays the average

value for a good, rather than themarginal value, then the consumersurplus is zero.


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Figure 14.11 All-or-nothing demand curve


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Figure 14.12 The exploitation of affection

Eaton Micro 6e Ch14

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