Price Discrimination Cartoon Interview Style. Hi, my name is Bill Gates, the current chairman of Microsoft which is the world’s largest personal computer software company. Microsoft is an example of a Monopoly and so is known as a Price Maker because it dominates the Windows Market. Monopoly companies often are involved in Price Discrimination because they have market power. Hi Bill, I’m Jack!What is Price Discrimination? That’s a very good question Jack. Basically, it is when firms try to sell the same good to different customers for different prices even though the costs of producing for the two customers are the same.
But why would a monopolist do this Bill?Well Jack, they would do this to maximiseprofits for the firm.Remember that Marginal Cost is thechange in total cost that arises whenquantity produced changes by one unit. Amonopolist charges above marginal cost.They charge the customer a price closer tohis or her willingness to pay. Think of when a new book is published such as Harry Potter. At first an expensive hardback edition is released and eventually a cheaper paperback one is the difference in the printing costs between the two is very little compared to the difference in price but it is based on the willingnessof the customer to pay. The eager fans will pay more at first than those who wait.
But Bill, how do you know a customer’s willingness to pay?Well Jack, Perfect Price Discrimination is when themonopolist knows exactly the willingness to pay ofeach customer and can charge them a different priceBut in reality price discrimination is not alwaysperfect.Normally firms divide their customers into groupsbased on age, income,nationality.Below are examples of price discrimination.
Cinemas price Airlines also price discriminate by discriminate byoffering different prices When a firm offers a dividing customers into to children,adults and discount the also price personal and businesssenior citizens because discrimiinate. They can travellers. Business they know seniors do this by offering travallers have a higher citizens and children coupons or lower willingness to pay. Also have a lower prices to those that the time of year willwillingness to pay. The buy higher quantities affect the price as price of providing the of a good. well.e.g at Christmas seat is the same for time prices go up. everyone.
Examples of Price Discrimination
Public Policy Toward Monopolies Are Monopolies a good thing? And if not how can you respond to them?Hi Jack! I am Enda Kenny, Head of the IrishGovernment and I’m going to be talking aboutPublic Policy Towards Monopolies.No they are not because they charge prices abovemarginal cost and fail to allocate their resourcesefficiently.Policy Makers in the Government can respond tothis problem in 4 ways:
1.More 2.RegualteCompetitive Behaviour of the Industry Monopolies 3.Public 4.Doing NothingOwnership at all H Jack! I’m Michael O’Leary, the CEO of Ryanair. I am going to be talking about the first way a government can respond to a monopoly which is to make the industry more competitive. Governments to promote competition in an Industry will closely examine a proposed merger between two companies that already have a significant a market share.
How and why would a Government do that? Well Jack, take for example how, at the moment, I am trying to take over Aer Lingus. Since Ryanair and Aer Lingus are two of the biggest competing airlines in the market the consequences of the merger need to be closely examined because it could make the market less competitive! In Europe each country has their own Competition Authority. These National Competition Authorities co- operate with each other and with the Eu Competition Commission through the ECN( European Competition Network). Take a look below Jack! The ECN National Other National EUCompetition Competition CompetitionAuthorities. Authorities. Commission.
Ah I see how the ECN works now! Thanks Michael! Take a look at this video from Financial News about the takeover bid!http://www.youtube.com/watch?v=S4rZ_-dKxlw But how are these competition laws enforced Michael?
All National CompetitionLegislation has to be in line withEU Legislation overall.Cross border cases are dealtwith by EU Law And what do these laws cover Michael? Below is an easy to read diagram to help you understand the areas covered by law.
Against Cartels which prevent Free Trade. To Ban anti- Monitor and competitive Examine price Acquisitions strategies such and Joint as price fixing. Ventures. But remember Jack, mergers can also be beneficial. Companies can merge to lower costs through more efficient production. These are known as synergiesI’m backto explain the secondway governments can respondto a monopoly and that isthrough Regulation!
Welcome Back Enda! How does the Government do this? Can you give me some examples?Think of Natural Monopolies thatyou know such as utility companieslike gas, water and electricity.We the government regulate theirprices and stop them charging theprice they want!
Oh yeah I know some examples!Yes Jack they are someexamples of utility companiesthat the government regulates!The next question to decide ishow the government should seta price for a natural monopoly?
And how does the government set this price Enda?Firstly you cannot set the price equal tothe company’s marginal cost becausein general natural monopolies have adeclining average total cost andmarginal cost is less than this so if theprice was set to equal the marginalcost, the company would lose money!
For a Natural MonopolyAVERAGE COST > MARGINAL COST So how does the regulator respond to this price problem?They canSUBSIDISE themonopolist. But how do they raise the money to pick up the losses from this marginal cost pricing?
They raise money through TAXATION. Firms in a Competitive Market benefit from lower costs because this leads to higher profits. However when costs fall for a monopoly the regulator will reduce the price so there is no incentive for a monopoly to lower costs.
Public Ownership of a Monopoly So far Jack we have looked at two ways in which a government can respond to a monopoly. That is by making the industry more competitive and by regulation. And what is the third way Enda? Public Ownership
Oh yes I know that this is called a nationalised Industry! The government runs the monopoly! Yes Jack! And now that you have been studying economics, which do you think is better, private or public ownership? Well a private firm would have more of an incentive to lower costs because that will mean higher profits but with public ownership if they firm loses money the taxpayer will have to pay the losses!An excellent point Jack.Look below for some examples ofPublic Owned Companies inIreland.
Doing Nothing The 3 ways to deal with a monopoly that we have discussed also have drawbacks. So the government can also do nothing and let them regulate themselves.
Okay Enda so now that we have discussed a monopoly I think I can draw some conclusions about them! Inefficiences can be mitigatedCharge prices above marginal through Price Discrimination cost , causing deadweight or by Policy Makers like the losses. Government. Monopoly Monopoly power is limitedDownward Sloping Demand because they cannot raise Curve. prices too much because of substitutes. Yes Jack they are all excellent conclusions about a monopoly. I hope that you have learned the difference now between a monopoly and a competitive firm! I have summarised them for you below!
Many FirmsCannot earn economic MR=MCprofits in the long run. Price Discrimination Price=MC not Possible Monopoly
One Firm Can earneconomice MR=MCProfit in the long run. Price Discrimination Price > MC is Possible Thank you so much Enda, Michael, Bill and Harry! I have learnt a lot about what price discrimination is and about the behaviour of monopolies in our society! I even have now some interesting real life examples of them and it was great to get insight from some of the people behind them!