Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 5  Firm Behavior and the Organization of Industry

Chapter 15 of 36  Monopoly

Section 24 of 33

…

Table B here

…

Readalot Publishing Company’s marketing department has determined the book it wants to sell will attract two types of readers

· the author's 100,000 diehard fans who are willing to pay as much as $30

· 400,000 others who will pay up to $5

The marketing department also discovers these two groups of readers are in separate geographic markets

· the diehard fans live in Australia

· the other readers live in the United States

…  

In this case it is difficult for readers in one country to buy the book in the other because only two separate online services sell it, one in Australia and the other in the U.S.

So, Readalot can change its marketing strategy and increase profits.

It can charge $30 for the book to the 100,000 Australian readers.

It can charge $5 for the book to the 400,000 American readers.

…  

Per Table B Case 3

Readalot decides to implement this price discrimination, and sales revenue becomes

· $3 million in Australia

· $2 million in the United States

· for a total of revenue of $5 million

$5 million revenue - $2 million payment to the author = $3 million profit

This $3 million profit is substantially greater than what Readalot could earn charging either $30 or $5 to all customers

As a result of the price discrimination the deadweight loss of $2 million in the market for this book is eliminated.

…

This hypothetical case of Readalot describes the business practice of many real-life publishing companies.

There is a substantial price difference between the initial high price hardcover edition and later low price paperback edition of the same book.

The price difference between these two editions is far greater than the difference in printing costs.

… … 

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