Monopoly: The Special Case of Perfect Price Discrimination

Summary

The video delves into the concept of perfect price discrimination within a monopoly, an advanced topic in economics. Price discrimination is when a firm sells the same product at different prices to different customers. The speaker explains that for it to occur, firms must have market power and be able to prevent reselling, allowing them to charge different prices. The video uses graphs to explore how a perfectly price discriminating monopolist charges each customer the maximum they are willing to pay, thus eliminating consumer surplus and maximizing profits efficiently. By comparing this to regular monopolies, the speaker highlights the allocative efficiency achieved through perfect price discrimination, despite the perceive unfairness to consumers.

Highlights

• The concept of price discrimination is crucial in monopolistic markets, allowing firms to charge different prices based on consumer segments 🏷️.
• Perfect price discrimination results in firms charging each individual the highest price they're willing to pay, maximizing firm profits 💰.
• This model aligns marginal revenue with price, similar to perfect competition, but retains a monopolistic demand curve 📊.
• Perfectly price discriminating monopolists eliminate deadweight loss by producing at allocatively efficient quantities 🎢.
• The trade-off involves great profits for the firm but zero consumer surplus, raising questions about fairness 🚫.

Key Takeaways

• Perfect price discrimination allows monopolies to extract all consumer surplus by charging each customer exactly what they're willing to pay 🎯.
• Unlike regular monopolies, perfectly price-discriminating monopolies produce the allocatively efficient quantity, avoiding deadweight loss ⚖️.
• Though this model maximizes profits for firms, it leaves consumers with no surplus, highlighting potential fairness issues in pricing ☹️.
• This approach requires significant market power and control over the customer segments, making it rare in practice 📉.
• Despite potential inefficiencies, perfectly price-discriminating monopolies achieve a unique balance between output and resource allocation 🌐.

Overview

In this illustrative video, George Frost explores the intriguing concept of perfect price discrimination within monopolies. The speaker provides a comprehensive explanation of how price discrimination works - when a firm charges different prices to different buyers, even though the cost of serving each customer is the same. This powerful strategy allows firms to maximize their profits by extracting the entire consumer surplus.

Frost dives into the nuances of perfect price discrimination by illustrating how a monopolist would approach pricing if they knew exactly what each consumer was willing to pay. Through a rich discussion and graphical analysis, we learn that this ability allows monopolies to produce the allocatively efficient quantity of goods. Hence, they avoid the deadweight loss typically associated with monopolies, a significant advantage in terms of efficiency.

Despite these efficiencies, the practice of perfect price discrimination poses questions about equity and fairness. While firms secure maximal profits, consumers end up with no surplus. This paradox showcases the delicate balance between vibrant economic efficiency and the distributional implications within market systems. The discussion compels a deeper consideration about the role of monopolies and price strategies in modern economics.

Chapters

• 00:00 - 05:00: Introduction to Price Discrimination in Monopoly The chapter introduces the concept of price discrimination within a monopoly context. It revisits the definition of price discrimination, where a firm charges different prices to different groups of customers despite the cost of providing the product being the same. The idea is linked to discussions from earlier in the semester, suggesting a need to review previous notes on the topic.
• 05:00 - 08:00: Examples of Price Discrimination Chapter explores the concept of price discrimination.
• 08:00 - 11:30: Perfect Price Discrimination Explained The chapter 'Perfect Price Discrimination Explained' discusses the intricacies of perfect price discrimination in economics. It outlines the challenges sellers face in identifying different demand levels among consumers, specifically differentiating between high and low demanders. The speaker highlights a critical requirement for successful price discrimination: preventing resale, as buyers charged lower prices might otherwise resale to those charged higher prices, counteracting the seller's pricing strategy.
• 11:30 - 13:00: Graphical Representation of Perfect Price Discrimination The chapter focuses on the concept of perfect price discrimination, illustrating it through various examples. It reminds us of price discrimination scenarios previously discussed, such as airlines charging different prices based on booking time and travel duration to distinguish between business and vacation travelers. Another example includes movie theaters setting varied ticket prices. The chapter emphasizes understanding perfect price discrimination through graphical representation to show how different companies implement pricing strategies to maximize revenue based on consumer differentiation.
• 13:00 - 15:00: Profit Maximization in Perfect Price Discrimination In the chapter titled 'Profit Maximization in Perfect Price Discrimination,' the focus is on how businesses set different prices for the same product based on consumer demographics or behavior to maximize profits. For example, seniors often pay lower prices due to their typically fixed incomes, making them more price-sensitive. Similarly, grocery stores might offer discounts to coupon users, who are presumed to be more price-sensitive than those who do not use coupons. This pricing strategy allows sellers to capture greater consumer surplus by tailoring prices according to varying customer price sensitivities.
• 15:00 - 19:00: Comparing Monopolist and Perfect Price Discriminator The chapter discusses different examples of price discrimination, with an emphasis on the concept of perfect price discrimination or first-degree price discrimination. The focus is on how graphs differ in these scenarios and the resulting efficiency. Perfect price discrimination occurs when a business can segregate every buyer based on the maximum price they're willing to pay.

Monopoly: The Special Case of Perfect Price Discrimination Transcription

• 00:00 - 00:30 okay what we're going to talk about now is a special case of Monopoly and that is when the Monopoly can price discriminate um we talked about price discrimination at the beginning of the semester and if you remember that's when um firm firms or a firm is charging two different um sets of prices to different sets of customers even though the costs of providing the product to those customers is the same and you can go back and review your notes and get the definition of price discrimination
• 00:30 - 01:00 so if you remember it's kind of hard to pull off price discrimination that's why we've been assuming that the Monopoly in question that we've been talking about has not been able to price discriminate right in order to price discriminate you have to have some Market power monopolies obviously have Market power but then more beyond that you have to be able to separate customers into different groups if you're going to charge a high price to one set of customers and a low price to another set of customers you obviously want to charge a high price to the people who are willing to pay more in a lower price that people willing to pay less but how
• 01:00 - 01:30 would you know who is who how would you be able to gauge who was a high demander who was a low demander and you have to be able to do that if you can price discriminate and finally once your price discriminate you have to be able to prevent those buyers who you're discriminating against from reselling the product right if you remember if I'm charging a high price to person a and charging a low price to person B person B will just start showing up at the store buying the product and then turning around and selling it to person a depriving me of the whole point of the price discrimination and again you can go back and review the video where we
• 01:30 - 02:00 talked about that in in detail we're going to be doing an example of of perfect price discrimination um perfect price discrimination is so just to remind you price discrimination examples we talked about Airlines charge different prices to customers um depending on when they buy the ticket they charge different prices sometimes depending on how long you're going to stay making a judgment whether you're a business traveler or a vacation traveler movie theaters charge different prices
• 02:00 - 02:30 based on based on um uh what age you are seniors pay a lower price than than non-seniors um the logic being seniors are on a fixed income so maybe they're not going to spend as much they're more sensitive to price um uh grocery stores charge different prices to people who collect coupons and people who don't collect coupons probably reasoning that people who take the time to clip coupons and figure out these deals they're more sensitive to price than people who don't have as much as much time
• 02:30 - 03:00 um maybe time to do these sorts of things so these are all quick examples of price discrimination you can get some more from your textbook and a more of an explanation what I really want to focus on today is the graph and how the graph looks differently and also what the efficiency how the efficiency results so um we're going to be talking about a special case of price discrimination it's called perfect price discrimination um so let's refer to as first degree price discrimination but I'll call it perfect price discrimination and this is when a business can separate every buyer by the maximum that they're willing to
• 03:00 - 03:30 pay so it's like they could look into your soul and charge you the highest price that you are willing to pay for every customer notice the other examples of price discrimination people are lumped into categories seniors people who buy tickets late it's not uh for airline driving it's not every every single person so in this example it's going to be an extreme form of price discrimination all right so I'm going to draw a graph and this graph is going to be it's going
• 03:30 - 04:00 to show the demand curve and so I want you to imagine that um pers this person or somebody's want to pay let's say they're willing to pay at twenty dollars for this particular item so what does the business charge well the business charges twenty dollars so if I put it so let's put together a little chart which shows what we're doing here so um we'll put price here put quantity
• 04:00 - 04:30 here put total revenue here put marginal revenue here all right so if the price were 22 let's say well if you notice that's off the chart so let's say it's off the chart so 22 let's say people are going to buy nothing which means your Revenue would be zero and your marginal revenue number you can't calculate at zero units because uh you're just starting out so let's say the price now you drop the price to twenty dollars you pick up this extra person's business right drop the price 22 you pick up this person one your total revenue is uh 20.
• 04:30 - 05:00 your marginal rep is 20. now what happens if you want to sell another unit well if you sell another unit you're gonna have to drop the price let's say to 18. now if you remember when we did Monopoly we said oh well that means your total revenue is going to be 36 18 times 2 is 36 price times quantity and if you remember we said oh yeah that's the problem for the monopolist when they try to sell this extra unit they lower the price from 20 to 18 and they pick up
• 05:00 - 05:30 business of by selling the extra unit but they had to drop the price on everybody but not so for the price discriminator the price discriminator is going to sell the second unit and they're only going to drop the price on the second unit so the revenue that they get from the first unit they're still getting the 20 from the first unit and they're getting 18 from the second so they get 20 from the first 18 for the second that means their total revenue is 38. 20 for the first unit 18 for the second because they're only lowering the price on the second unit well they're marginal revenue now
• 05:30 - 06:00 goes from 20 to 38 their marginal revenue is 18. notice by the way marginal revenue same as price margin of Revenue same as price let's see if it happens again I want to sell a third unit if I want to sell a third unit what do I got to do I got to lower the price so let's say I lower the price to 16. to sell the third unit so now they sell the third unit for 16. you some of you might be saying oh your total revenue is 48 3 times 16. but no that assumes I'm charging 16 to all for all three units I'm not I'm charging 20
• 06:00 - 06:30 on the first 18 on the second and 16 on the third well I'm getting 20 in the first 18 in the second that's 38 plus another 16 from the third unit that's 54. and my margin revenue is 16 again so notice something interesting for the perfectly priced discriminate discriminating monopolist which is what this is um that their marginal revenue is equal to their price marginal revenue equal the price marginal revenue equal the price so this demand curve is equal to marginal revenue which is also equal to
• 06:30 - 07:00 the price that's very different from monopolis right if you remember for monopolist the marginal revenue was less than the price because in order to sell another unit they had to lower the price on on everybody right but that's not true for the perfectly priced discriminate monopolist they just have to lower the price on the next customer they keep they're charging different prices to different people 20 to person one in this case 18 and person two and 16 a person to person three so that now you have a demand curve which equal to marginal revenue which is equal to the
• 07:00 - 07:30 price this is a little like perfect competition in the sense that marginal revenue and price are the same thing but obviously the downward sloping demand curve is like a monopolist so what I want to do now is I want to show you what the graph would look like in terms of profit maximization so demand is equal to marginal revenue which is equal to price right and um how does the firm maximize profits well they maximize profits by equating marginal revenue to marginal cost
• 07:30 - 08:00 so here's marginal cost draw the same way for the exact same reasons where is the firm maximize profits they maximize profits right here quantity Monopoly this is price discriminating Monopoly called PD quantity prices what's kind of interesting about this particular um about this particular firm is they are maximizing their profits where marginal revenue equals marginal cost but notice price and marginal cost are
• 08:00 - 08:30 equal to each other for the case of the perfectly price discriminating monopolist basically what's happening if you think about this is is that the monopolist is actually producing the exact right number of units there's no deadweight loss they keep on producing until price is equal to marginal cost which is our condition for allocative efficiency no dead weight loss what they're doing is they're not losing any we're not losing any trades they're just converting every ounce of consumer surplus to themselves right if you
• 08:30 - 09:00 remember from the previous problem I was just doing um what was the maximum that person one was willing to pay twenty dollars what do they charge them twenty dollars that means that consumer got no no extra Surplus right the producer got out of the Surplus profit in terms of profit the next person was going to pay 18 you charge them 18 you convert all the Surplus for yourself so you actually produce the right amount of goods and services it's at perfectly price discriminating monopolists are allocatively efficient there's just no consumer surplus all the Surplus goes to
• 09:00 - 09:30 the producer remember when we talked about deadweight loss and we talked about um efficiency I don't begrudge the monopolist who gets profits and consumers producers they're all the same they're just people the problem is is that the monopolist creates dead weight loss but not this monopolist they just convert every single um ounce of surplus to themselves but they do um they do produce the right quantity so um if I asked you this uh who makes a larger profit a monopolist or a
• 09:30 - 10:00 perfectly price discriminating monopolist well you should be saying a perfectly price discriminating monopolist because they capture all the Surplus themselves make enormous amounts of profit who produces more units well again the perfectly price discriminating monopolist produces a larger quantity than a regular monopolist because they can lower the price and sell those extra units without lowering the price on everybody um and again and finally which of the which monopolist is more allocatively
• 10:00 - 10:30 efficient the perfectly price discriminating monopolist or the monopolist and the answer is perfect price discriminating monopolist is more allocatively efficient they produce the right amount of goods and services from society's point of view they just um they just convert all the Surplus to themselves so um you wouldn't really want to be a consumer in this particular um in this particular Market because you lose all Surplus but but we are allocatively efficient so it's kind of of an odd odd result for the perfectly priced discriminating monopolist so just
• 10:30 - 11:00 to kind of review for a perfectly price discriminating monopolist the demand curve is equal to the marginal revenue curve which is equal to the price and as a result of that they produce a larger output than monopolist they produce the allocatively efficient output they earn larger profits than any other firm right this is like a dream um and they convert all consumer surplus um to them for themselves so there's zero consumer surplus in this model and
• 11:00 - 11:30 so this is just a slight Ferry we're going to spend a lot of time on it it's just a slight variation of the normal Monopoly model when you have price discrimination involved some people when they hear price discrimination assume this is going to be automatically bad for efficiency results what I'm trying to show you here is it gives you more actually complicated answer in terms of efficiency results allocate efficiency looks great uh distributionally looks very unfair because the monopolist is making every ounce of surplus but these are questions for other people to weigh