Micro CHAPTER 4.3:

Price Discrimination

CHAPTER SUMMARY

You probably know from Social Studies that discrimination means to treat different people differently. In economics, price discrimination means charging different customers different prices. For a monopolist to be able to price discriminate, they have to be able to...

Segment the market into different groups - this allows them to charge people more if they are willing & able to pay more.
Prevent resale of their product - otherwise, there would be a perfectly competitive marketplace for the product, limiting the monopolist's ability to sell at a higher price.

There are several effects if a monopolist is able to price discriminate:

The demand curve is now also the MR curve. This is because the monopolist does not have to lower their prices for all customers to sell one more unit to the marginal customer.
There is no consumer surplus - it is all transferred to producer surplus.
Long-run profits increase, because everything is the same as before, except that the firm can now charge a higher price to the customers willing to pay the most.

When a firm is able to price discriminate, their economic profit increases, as can be seen in the (very blurry) charts below. The left chart represents a typical monopolist, while the right chart represents a monopolist with price discrimination. Because they are able to charge prices all along the demand curve, they increase their profit by taking the consumer surplus and changing it into producer surplus.

It is worth noting that price discrimination is not only for monopolists. There are some examples, though, of monopolies that price discriminate:

In Vietnam, EVN charges you more money the more power you use. Your first KwH of energy only costs 1.500 VND, but once you reach a certain level, you have to pay up to 4.000 VND per KwH. This allows them to charge more money to people who have higher demand for electricity.

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