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Price Discrimination Strategies Explained

The document discusses price discrimination strategies for a monopolist operating in two distinct markets with different demand functions. It includes questions on calculating equilibrium prices, quantities, and profits for a nightclub manager and a monopolist serving two consumer groups. The analysis covers scenarios of uniform pricing, linear pricing, two-part pricing, and the effects of taxation on pricing strategies.

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natalia
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20 views2 pages

Price Discrimination Strategies Explained

The document discusses price discrimination strategies for a monopolist operating in two distinct markets with different demand functions. It includes questions on calculating equilibrium prices, quantities, and profits for a nightclub manager and a monopolist serving two consumer groups. The analysis covers scenarios of uniform pricing, linear pricing, two-part pricing, and the effects of taxation on pricing strategies.

Uploaded by

natalia
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Price Discrimination, Part I

Question 1
Consider a monopolist that sells in two distinct markets and price discriminates between them. The demand function
in the first market is given by q1 = 50 − p1 , and in the second market it is given by q2 = 100 − p2 . The monopolist’s
total cost function is C(q1 + q2 ) = (q1 + q2 )2 .

1. Find the equilibrium quantities supplied and prices charged in each market.
2. Calculate monopolist’s profit.

Question 2
A nightclub manager realizes that demand for drinks is more elastic among students, and is trying to determine the
optimal pricing schedule. Specifically, he estimates the following average demands:
• Under 25: q r = 18 − 5p
• Over 25: q = 10 − 2p
The two age groups visit the nightclub in equal numbers on average. Assume that drinks cost the nightclub $2 each.

1. If the market cannot be segmented, what is the uniform monopoly price?


2. If the nightclub can charge according to whether or not the customer is a student but is limited to linear
pricing, what price (per drink) should be set for each group?
3. If the nightclub can set a separate cover charge and price per drink for each group, what two-part pricing
schemes should it choose?
4. Now suppose that it is impossible to distinguish between types. If the nightclub lowered drink prices to $2 and
still wanted to attract both types of consumers, what cover charge would it set?
5. Suppose that the nightclub again restricts itself to linear pricing. While it is impossible to explicitly ”age
discriminate”, the manager notices that everyone remaining after midnight is a student, while only a fraction
2
7 of those who arrive before midnight are students. How should drink prices be set before and after midnight?
What type of price discrimination is this? Compare profits in (5) and (4).

Question 3
Consider a monopolist that supplies to two distinct groups of consumers: Group A and Group B. The demand by
Group A consumers is given by QA = 100 − 8PA . Group B consumers’ demand function is QB = 100 − 4PB . The
monopolist’s marginal cost of production equals to 1.
1. Find the total demand that monopolist faces.
2. Suppose that the monopolist charges uniform price to each group. Find the equilibrium price and quantity.
Calculate monopolist’s total profits.

1
3. Now suppose that monopolist implements the Third Degree Price Discrimination. Find equilibrium prices that
the monopolist charges to each group. What are the equilibrium quantities supplied? Calculate monopolist’s
total profits.
4. Would monopolist prefer to price discriminate or charge a uniform price?

5. Suppose the monopolist is taxed by some fixed amount τ > 0 only if it chooses to price discriminate. Find the
amount of τ such that the monopolist always prefers to charge a uniform price.

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