Price Discrimination Cartoon

Interview Style.

Hi my name is Bill Gates, the current chairman of Microsoft which is the worlds largest personal computer software company.

Microsoft is an example of a Monopoly and so is known as a Price Maker because it dominates the Windows Market.

Monopoly companies often are involved in Price Discrimination because they have market power.

Hi Bill I’m Jack! what is Price Discrimination?

Thats a very good question Jack.

Basically it is when firms try to sell the same good to different customers for different prices even though the costs of producing for the two customers are the same.

But why would a monopolist do this Bill?

Well Jack , they would do this to maximise profits for the firm.

Remember that Marginal Cost is the change in total cost that arises when quantity produced changes by one unit. A monopolist charges above marginal cost.

They charge the customer a price closer to his or her willingness to pay.

Think of when a new book is published such as Harry Potter. At first an expensive hardback edition is released and eventually a cheaper paperback one is.The difference in the priniting costs between the two is very litte compared to the difference in price but it is based on the willingness of the customer to pay. The 'eager' fans will pay more at first than those who wait.

But Bill how do you know a customers willingness to pay?

Well Jack, Perfect Price Discrimination is when the monopolist knows exactly the willingness to pay of each customer and can charge them a different price

But in reality price discrimination is not always perfect.

Normally firms divide their customers into groups based on age, income,nationality.

Below are examples of price discrimination.

Cinemas price discriminate by

offering different prices to children,adults and senior citizens because

they know seniors citizens and children

have a lower willingness to pay. The price of providing the seat is the same for

everyone.

Airlines also price discriminate by

dividing customers into personal and business

travellers. Business travallers have a higher willingness to pay. Also

the time of year will affect the price as

well.e.g at Christmas time prices go up.

When a firm offers a discount the also price discrimiinate. They can

do this by offering coupons or lower

prices to those that buy higher quantities

of a good.

Examples of Price Discrimination

Public Policy Toward Monopolies

Are Monoplies a good thing? And if not how can u respond to them?

Hi Jack ! im Enda Kenny, Head of the Irish Government and I’m going to be talking about Public Policy Towards Monopolies.

No they are not because they charge prices above marginal cost and fail to allocate their resources efficiently.

Policy Makers in the Government can respond to this problem in 4 ways:

1.More Competitive

Industry

2.Regualte Behaviour of the

Monopolies

3.Public Ownership

4.Doing Nothing at all

H Jacki ! I’m Michael O’Leary the CEO of Ryanair. Im going to be talking about the first way a government can respond to a monopoly which is to make the industry more competitive

Governments to promote competition in an Industry will closely examine a proposed merger between two companies that already have a significant a market share.

How and why would a Government do that?

Well Jack take for example at the moment I am trying to take over Aer Lingus. Since Ryanair and Aer Lingus are two of the biggest competing airlines in the market the consequences of the merger need to be closely examined because it could make the market less competitive!

In Europe each country has their own Competition Authority. These National Competition Authorites co-operate with each other and with the Eu Competition Comission through the ECN( European Competition Network). Take a look below Jack!

The ECN

National Competition Authorities.

Other National Competition Authorities.

EU Competition Commission.

Ah I see how the ECN works now! Thanks Michael!

http://www.youtube.com/watch?v=S4rZ_-dKxlw

Take a look at this video from Financial News about the takeover bid!

But how are these competition laws enforced Michael?

All National Competition Legislation has to be in line with EU Legislation overall.

Cross border cases are dealth with by EU Law

And what do these laws cover Michael?

Against Cartels which prevent

Free Trade.

Monitor and Examine

Acquisitions and Joint Ventures.

To Ban anti-competitive

price strategies such as price fixing.

Below is an easy to read diagram to help you understand the areas covered by law.

But remember Jack, mergers can also be beneficial. Companies can merge to lower costs through more efficient production. These are known as synergies

I’m back Jack to explain the second way governments can respond to a monopoly and that is through Regulation!

Welcome Back Enda! How does the Government do this? Can you give me some examples?

Think of Natural Monopolies that you know such as utility companies like gas, water and electricity.

We the government regualte their prices and stop them charging the price they want!

Oh yeah I know some examples!

Yes Jack they are some examples of utility companies that the government regulates!

The next question to decide is how the government should set a price for a natural monopoly?

And how does the governement set this price Enda?

For a Natural Monopoly

AVERAGE COST > MARGINAL COST

Firstly you cannot set the price equal to the company’s marginal cost because in general natural monopolies have a declining average total cost and marginal cost is less than this so if the price was set to equal the marginal cost, the company would lose money!

So how does the regulator respond to this price problem?

They can SUBSIDIZE the monopolist.

But how do they raise the money to pick up the losses from this marginal cost pricing?

They raise money through TAXATION.

Public Ownership of a Monopoly

Firms in a Competitive Market benefit from lower costs because this leads to higher profits.

However when costs fall for a monopoly the regulator willl reduce the price so there is no incentive for a monopoly to lower costs.

So far Jack we have looked 2 ways in which a government can respond to a monopoly. That is by making the industry more competitive and by regulation.

And what is the 3rd Enda?

Public Ownership

Oh yes I know that this is called a nationalized Industry! The government runs the monopoly!

Yes Jack! And now that you have been studying economics, which do you think is better, private or public ownership?

Well a private firm would have more of an incentive to lower costs because that will mean higher profits but with public ownership if they firm loses money the taxpayer will have to pay the losses!!!

An excellent point Jack.

Look below for some examples of Public Owned Companies in Ireland.

Doing Nothing

Charge prices above marginal cost , causing deadweight

losses.

Inefficiences can be mitigated through Price Discrimination or by Policy Makers like the

Government.

Downward Sloping Demand Curve.

Monopoly power is limited because they cannot raise

prices too much because of substitutes.

Monopoly

The 3 ways to deal with a monopoly that we have discussed also have drawbacks.

So the government can also do nothing and let them regulate themselves.

Okay Enda so now that we have discussed a monopoly I think I can draw some conclusions abou them!

Yes Jack they are all excellent conclusions about a monopoly. I hope that you have learned the difference now between a monopoly and a competitive firm! I have summarised them for you below!

Competition

Many Firms

MR=MC

Price=MCPrice

Discrimination not Possible

Cannot earn economic

profits in the long run.

Monopoly

One Firm

MR=MC

Price > MCPrice

Discrimination is Possible

Can earn economice Profit in the

long run.

Thank you so much Enda, Michael, Bill and Harry! I have learnt a lot about what price discrimination is and about the behaviour of monopolies in our society!

I even have now some interesting real life examples of them and it was great to get insight from some of the people behind them!