Hello everyone, I’m Le Phuc and I will present about Price

Discrimination. Through my presentation, you will know the answer to

the question "What is price discrimination?"
First, Discrimination is treating people differently based on some
characteristic
For example gender or race
Price Discrimination is the business practice of selling the same good at
different prices to different customers.
For example: Spotify has discounted for students who will get a upgrade
to Premium account at the price of four dollars and ninety-nine cents
instead of seven dollars for adults. (why)
Before discussing the behavior of a price-discriminating monopolist. We
should note that the price discrimination is not possible when a good is
sold in a competitive market. In a competitive market, many firms are
selling the same good at the market price. The firm can sell all it wants
at the market price and if any firm tried to sell their product at a higher
price to a customer, he or she would buy from another firm.
( a monopolist firm can increase profit by charging a higher price to
buyers with higher WTP)
So for a firm to price discriminate, it must have some market power.
Market power is the ability of a firm to profitably raise the market price
of a good or service over marginal cost
I’ll give you an example about pricing to understand why a monopolist
would price discriminate.
A famous composer of a music production company named "MTV" has
just composed 8 new songs. Imagine that the cost of producing the
album of 8 new songs is zero and MTV had to pay the composer a flat 3
million dollars for the exclusive production of those new songs.
MTV’s marketing department tells that there are two types of customers
who will buy it. In the market, there are two hundred thousand die-hard
fans who are willing to pay as much as 50 dollars and there are five
hundred thousand less enthusiastic listeners who will pay up to 10
dollars.
If MTV charged a single price to customers, two decisions could be
made. The first one is the company can sell the album to 200,000 die-
hard fans at the price of 50 dollars The total revenue here equals price
multiplied by quantity sold, equals 50 multiplied by 200 thousand,
equals 10 million dollars and its profit is the revenue from selling the
album minus the 3 million dollars it has paid to the composer. So the
profit is 7 million dollars.
The second decision can make is the company can sells albums to all
customers including 200,000 die-hard fans and 500,000 less enthusiastic
listeners at the price of 10 dollars. So the total revenue is 7 million
dollars and the profit is 4 million dollars.
Now as you can see, if MTV sells albums to 200,000 (two hundred
thousand) die-hard fans at the price of 50 dollars, they will maximize
their profit and forgoing the opportunity to sell to the five hundred
thousand 500,000 less enthusiastic listeners
However, this decision causes a deadweight loss. Because they have
forgone the opportunity to sell to the 500,000 less enthusiastic listeners
at the price of 10$. Thus, 5 million dollars (of total surplus - The
deadweight loss here equals total surplus lost because of monopoly
pricing.) is lost when MTV charges the higher price. It is the
inefficiency that rises whenever a monopolist charges a price above
marginal cost.
(The monopolist produces less than the socially efficient quantity of
output)
Now suppose that, 200,000 die-hard fans is living in the USA and
500,000 others listeners is living in the UK. MTV has changed its
strategy, It sell to 200,000 die-hard fans at the price of 50 dollars and
500,000 others listeners at the price of 10 dollars.
If MTV uses this strategy, it will receive a profit of 12 million dollars.
Not surprisingly, MTV chooses to follow this strategy of price
discrimination because it has the greatest profit
Next I’ll talk about perfect price discrimination vs. single price
monopoly
In this graph I assume that marginal cost and average total cost are
constant and equal. Here, the monopolist charges a single price to all
customers at PM and above marginal cost
Because of willingness to pay of some buyers higher than the price, the
consumer surplus here measures the benefit buyers receive from
participating in this market. (CS: Willingness to pay of a buyer minus
the amount the buyer actually pays for it, in this case, it’s PM)
And the monopoly profit is the green rectangle here. As I have said that
marginal cost and average total cost are constant and equal, so the
monopoly profit here equals price minus average total (marginal) cost,
all of them multiplied by Q
Because some potential customers who (whose willingness to pay is
smaller than PM so they can not buy this product, the monopoly causes a
deadweight loss) value the good at more than marginal cost do not buy
this product at this price, the monopoly causes a deadweight loss. The
deadweight loss here equals total surplus lost because of monopoly
pricing. (At the profit-maximizing level of output, MC=MR.
(Maximizing profitquantity))
On Monopolist with Perfect Price Discrimination, the monopolist
produces the competitive quantity, but charges each buyer his or her
WTP. This is called Perfect Price Discrimination.
Each customer who values the good at more than Marginal cost buys the
good and is charged his or her willingness to pay, so the firm can sell
products to all customers in this market. As a result, there is no
deadweight loss and the monopolist captures all Consumer surplus as
profit (charges each buyer his or her WTP and seller will get the revenue
which equal buyer’s WTP -> MR curve = Demand curve, because all
mutually beneficial trades take place, consumer surplus equals zero, total
surplus equals the firm’s profit)
However, in real world, perfect price discrimination is not possible
because no firm knows every buyer’s WTP and buyers do not announce
it to sellers.
So, firms divide customers into groups based on some observable trait
that is likely related to WTP, such as age, gender or income
Next, I’ll give you 5 typical examples of price discrimination. They are
Movie tickets, Airline Prices, Discount Coupons, Need-based financial
aid, Quantity Discounts.
(Because we don’t have much time I will skip this part, all of this
example are in the text book, so you can read it at home)
 Movie tickets discounts for seniors, student, and people who can
attend during weekday afternoons. They are all more likely to have
lower WTP than people who pay full price on Friday night.
 Airline prices: Discounts for Saturday-night stay overs help
distinguish business travelers, who usually have higher WTP, from
more price-sensitive leisure travelers.
 Discount coupons: People who have time to clip and organize
coupons are more likely to have lower income and lower WTP
than others.
 Need-based financial aid: low income families have lower WTP
for their children’s college education. Schools price-discrimination
by offering need-based aid to low income families.
  Quantity discounts: A buyer’s WTP often declines with additional
unit, so firms charge less per unit for large quantities than smaller
ones. For example: A movie theater charges $4 for a small popcorn
and $5 for a large one that’s twice as big.
_____
 Econo
mic profit, Trên đường cầu – the average revenue per unit
Trên ATC – The average cost per unit