Price Discrimination Requires
- Market power
- Ability to differentiate different consumer types
- Ability to prevent ‘arbitrage’
Price Discrimination Types
- Direct: explicit, based on provable characteristics (eg student vs pensioner)
- Indirect: self-selecting (eg leisure vs business travellers)
MR and Elasticity in Monopoly
When MR = 0, e = -1
* Any higher quantity would produce negative MR
* Because you have saturated the elastic part of the market
* (to the left of the demand curve)
Profit Maximising in Monopoly
Maximum profit is where: MR = MC
* NOTE: This is not equal to Price in a monopoly
Monopoly MR and Demand Curves
- MR Curve has twice the gradent of the Demand Curve
- Both cross the Y axix at the same point
- Q where MR=MC is where the Demand Curve is Unit Elastic
Price Discrimination - Calculating Price
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Types of Price Discrimination
- two-part tariff - up-front fee + fee per unit usage
- Versioning - remove features, release new versions
- Bundling - include multiple products in the same unit
When to Bundle
If demands for the goods in the bundle are negatively correlated within each consumers’ preferences
Oligopoly
- Few Competitors
- No Entry
Monopoly - Calculating Price
Monopoly - Markup Maximizing Pricing Formula
Two-Part Tariff - similar vs different demands
- Similar Customer Demand - High Entry Fee, Low Per Ride Fee
- Different Customer Demand - Low Entry Fee, High Per Ride Fee
Lerner Index
Mark Up = (P-MC) / P
NOTE: To profit maximise in monopoly this is inversely proportional to elasticity
