Monopoly & Price Discrimination

Hall & Lieberman, Chapter 9

Price Discrimination
Single-price monopoly
Firm that is limited to changing same price for each
unit of output sold

Price discrimination occurs when a firm charges

different prices to different customers for
reasons other than differences in costs
Price-discriminating monopoly does not
discriminate based on prejudice, stereotypes, or
ill-will toward any person or group
Rather, it divides its customers into different
categories based on their willingness to pay for good

Requirements for Price

Discrimination
Although every firm would like to practice price
discrimination, not all of them can
To successfully price discriminate, three
conditions must be satisfied
Must be a downward-sloping demand curve for the
firms output
Firm must be able to identify consumers willing to pay
more
Firm must be able to prevent low-price customers
from reselling to high-price customers

Price Discrimination That Harms

Consumers
Price discrimination always benefits
owners of a firm
Can use this ability to increase its profit

When price discrimination raises price for

some consumer above price they would
pay under a single-price policy it harms
consumers
Additional profit for the firm is equal to
monetary loss of consumers

Figure 8a: Price Discrimination

(a)
Dollars per
Ticket
MC

$120

ATC

80

MR
30

D
Number of Round-trip Tickets

Figure 8b: Price Discrimination

(b)
Dollars per
Ticket

Additional profit from

price discrimination

MC

$160
120

MR
10

30

D
Number of Round-trip Tickets

Figure 8c: Price Discrimination

(c)
Dollars per
Ticket
MC

$120
100

Additional profit from

price discrimination

MR
30

30

D
Number of Round-trip Tickets

Price Discrimination That Benefits

Consumers
Price discrimination benefits monopoly at
the same time it benefits a group of
consumers
Since no ones price is raised, no one is
harmed by this policy
When price discrimination lowers price for
some consumers below what they would pay
under a single-price policy, it benefits
consumers as well as firm

Perfect Price Discrimination

Suppose a firm could somehow find out maximum price
customers would be willing to pay for each unit of output it
sells
It could increase profits even further by practicing perfect price
discrimination
Firm charges each customer the most the customer would be willing to
pay for each unit he or she buys
Increases profit at expense of consumers

Perfect price discrimination is very difficult to practice in the

real world
Would require firm to read its customers minds

Marginal revenue is equal to price of additional unit sold

Firms MR curve is same as its demand curve

Figure 9: Perfect Price

Discrimination
Dollars per
Doll

H
MR curve before
price discrimination

$30
E

25

10

MR
20

30

MC = ATC

60

Number of Dolls
per Day

The Decline of Monopoly?

Past century was not kind to monopolies
Today, monopolies face a different threat
Relentless advance of technology

The world of monopolies is changing

rapidly
But monopolies in many forms will be with us
for some time

Using the Theory: Price Discrimination

at Colleges and Universities
Most colleges and universities give some kind of
financial aid to a large proportion of their students
Financial aid has been used as an effective method of
price discrimination
Designed to increase revenue of the college

Colleges have long been in an especially good position

to benefit from price discrimination, because they satisfy
all three requirements
Face downward-sloping demand curves
Able to identify consumers willing to pay more
Able to prevent low-price customers from reselling to high-price
customers

Using the Theory: Price Discrimination

at Colleges and Universities
Most colleges have been active price discriminators for
decades
Under newer systems, those who can signal a lower
willingness to pay have benefited from reduced prices
While those signaling greater willingness to pay have suffered a
price increase

Result is vastly different prices for different students

Highly correlated to their families willingness to pay

Increased price discrimination at colleges, like so many

other economic issues, is a matter of tradeoffs