Communications Module 29 Homework Perfect Price Discrimination Creating Student Interest

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Module 29 krugman 1

Module 29

Price Discrimination

What’s New in the Fourth Edition?

• Handouts for use in class

Module Objectives

• What is price discrimination and why is it so prevalent in certain industries?

Teaching Tips

Price Discrimination Defined

Creating Student Interest

• Ask students how much it costs to see a movie at a theater. The question should prompt some

discussion of the market price. Students will also bring up the fact that different customers pay

different prices (seniors, children, students) and the price is different for movies shown on different

days and/or times (matinees, weekends). You can illustrate this by showing the prices charged at

your local theater.

Presenting the Material

• Use Handout 29-1 to have students consider price discrimination.

• Many students become very interested in examples of price discrimination and the fact that it is

illegal. They will often start asking you about specific examples. Make sure you emphasize that price

discrimination is charging different prices to different customers for the same product. Many of the

examples they bring up appear to be price discrimination, but in fact are not, because the product is

actually different. For example, phone calls and airline flights are different products when they occur

at different times or on different days. A dinner buffet for a child and an adult are different products.

Examples of actual price discrimination include charging men and women different prices for dry

cleaning the same type of shirt, or charging men and women different prices for the same drink.

The Logic of Price Discrimination

Creating Student Interest

• Ask students why firms may engage in price discrimination. Some might answer to make more

profit. Take them back to the concept of consumer surplus and producer surplus. Let them see that

consumer surplus can be captured by producers if they can manipulate their pricing.

Presenting the Material

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• Use text Figure 29-1 to illustrate the profits from two different groups of customers. Show that the

firm will earn the highest profit if it charges one price to the business travelers and one price to the

vacation travelers. Figure 29-1

Price Discrimination and Elasticity

Creating Student Interest

• Ask students whether working adults or college students are more price sensitive to restaurant meals.

Most will reply that students are more price sensitive. Remind them of the concept of elasticity, and

that students have a more elastic demand than most working adults. Ask students if they are more or

less likely to eat at a restaurant if there is a student discount available. They will most likely agree

that they would be. This is

Presenting the Material

• Use the example of airline travel by business and vacation travelers. The price elasticity of demand

for business travelers is calculated to be .54, or very inelastic. The price elasticity of demand for

Perfect Price Discrimination

Creating Student Interest

• Ask students if they have ever paid a cover charge. Most will admit they have, either for a bar or

perhaps a health club. Show them the way a cover charge captures consumer surplus.

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Presenting the Material

• Use a demand graph that has consumer surplus highlighted. Then, note at various prices the

consumers who will and who will not purchase at each price. Note that the more prices the

monopolist can charge (and segregate consumers correctly to), the more profit the firm makes.

Module Outline

I. Price discrimination

A. A single-price monopolist offers its product to all consumers at the same price.

B. Sellers engage in price discrimination when they charge different prices to different consumers

for the same good.

II. The logic of price discrimination

1. When a single firm sells the same good to two or more different types of customers, it

can earn more profit if it is able to charge different prices to each of the different types

of customers.

2. Most monopolists can increase their profits by engaging in price discrimination. This is

illustrated in text Figure 29-1, shown here.

Figure 29-1

VI. Price Discrimination and Elasticity

A. If a firm can identify two separate customer groups that have differing price elasticities of

demand, it can engage in price discrimination.

1. A firm with market power will raise the price on customers who have inelastic demand

and lower the price on customers who have elastic demand.

V. Perfect price discrimination

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A. Perfect price discrimination takes place when a monopolist charges each consumer his or her

willingness to pay—the maximum that the consumer is willing to pay.

B. The greater the number of prices the monopolist charges, the lower the lowest price; that is,

some consumers will pay prices that approach marginal cost.

Figure 29-2

C. The greater the number of prices the monopolist charges, the more money it can extract from

consumers.

D. Monopolies try to achieve perfect price discrimination by:

1. advance purchase restrictions.

Case Studies in the Text

Economics in Action

Sales, Factory Outlets, and Ghost Cities—This EIA presents examples of subtle forms of price

discrimination employed by oligopolists and monopolistic competitors.

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Ask students the following questions:

Web Resources

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Handout 29-1

Date_________ Name____________________________ Class________ Professor________________

Price Discrimination on Campus

Imagine that you represent the student government on campus. Can you engage in profitable price

discrimination on the following services? Why or why not?

Parking spaces

Theater productions

Sports events