Saturday, January 24, 2009

Video Lesson by Phil Holden: How A Monopolist Can Further Increase Its Supernormal Profit?

This video shows another way of illustrating price discrimination. In my lecture, I don't use this version as it's not that student-friendly. The diagram which I draw will have the MR & AR of both different market being put as if they are under a 'mirror-reflection'. Then I will draw an MC curve cutting through both. Using MC = MR1 = MR2, show that prices charged in 2 different markets (elastic & inelastic demand) are not the same

It is worth to take note the conditions for price discrimination:

(a) The firm must have some price making ability. That means, at least it must be in a monopolistic market & better if in monopoly

(b) The firm must be able to segregate the market into 2. The market with higher willingness to pay (PED less than 1) will be charged higher price, while another market with lower willingness to pay (PED greater than 1) will be charged lower price. This in fact is one of the main condition to increase its supernormal profit

(c) Must be able to prevent resell of product from one market to another. Otherwise price discrimination is a failure when a buyer can buy in the market with lower price & go to another market & sell it there with higher price. This is a practice of arbitrage

(d) The sum of supernormal profit for both new market must be larger than the original supernormal profit (before price discrimination) & costs of separating the market. If not price discrimination is futile

Women generally put more care onto their hair than men. Therefore they wouldn't mind to pay extra to get their hair nicely done. As such we say, women's demand is inelastic while men's elastic

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