Mostly summarized from Gregory Mankiw’s Principles of Economics, 5 th Ed. PART 5 Firm Behavior and the Organization of Industry Chapter 15 of 36 Monopoly Section 27 of 33 … Firms with some monopoly power use various methods of price discriminating among different customers to increase their profit. Movie theaters often charge a lower price for children and senior citizens. Willingness to pay for a ticket for children and senior citizens is lower. … Airlines sell seats on flights at different prices. Some charge a lower price for a round-trip ticket if the traveler stays over a Saturday night. This condition enables a separation of business travelers and leisure travelers. A passenger on a business trip has a high willingness to pay and mostly does not want to stay a Saturday night. A passenger traveling for personal reasons has a lower willingness to pay and is more likely to agree to staying a Saturday night. … Many retail stores offer discoun...
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Mostly summarized from Gregory Mankiw’s Principles of Economics, 5 th Ed. PART 5 Firm Behavior and the Organization of Industry Chapter 15 of 36 Monopoly Section 26 of 33 … Figure 9 here … Figure 9 - Welfare With and Without Price Discrimination Panel (a) shows a case where a monopolist charges the same price to all customers. Total surplus in this market equals the sum of profit (producer surplus) and consumer surplus Panel (b) shows a case where a monopolist can perfectly price discriminate. All consumers pay price equal to value to them. Total consumer surplus equals zero. Total producer surplus equals the firm's profit. … Perfect price discrimination · maximizes the monopolist’s profit · eliminates consumer surplus · eliminates deadweight loss · maximizes total surplus Perfect price discrimination describes a situation where the monopolist · knows exactly the willingness to pay...
Mostly Summarized from Gregory Mankiw’s Principles of Economics, 5 th Ed. PART 5 Firm Behavior and the Organization of Industry Chapter 15 of 36 Monopoly Section 25 of 33 … The story of Readalot Publishing Company is fictional, but it teaches three lessons about price discrimination. -1- Price discrimination is a rational strategy for a profit-maximizing monopolist because it increases sales and profits. With price discrimination, a monopoly firm charges customers a price closer to their willingness to pay, selling more quantity of product than with a single price. … -2- Price discrimination requires the ability to separate customers by their willingness to pay. In the Readalot example customers were separated by geography and online services. Monopolists commonly use differences such as income or age to distinguish among customers. … -3- Price discrimination raises overall economic welfare. A deadweight loss arises when Readalot charges a single...
Mostly summarized from Gregory Mankiw’s Principles of Economics, 5 th 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 ...
Mostly summarized from Gregory Mankiw’s Principles of Economics, 5 th Ed. PART 5 Firm Behavior and the Organization of Industry Chapter 15 of 36 Monopoly Section 23 of 33 … Table B here … We have assumed the monopoly firm charges the same price to all customers. Yet in many cases firms sell the same good to different customers for different prices. This happens even though the costs of producing for the two customers are the same. This practice is called price discrimination. … Price discrimination is not possible when a good is sold in a competitive market. Many firms are selling the same good at the same market price. No firm is willing to charge a lower price to any consumer because the firm can sell at the market price. If any firm tried to charge a higher price, consumers would buy from another firm. … For a firm to price discriminate, it must have some market power, a...