12 Monopolistic Competition and Advertising

• Some customers pay more than others.
• Markets work better when a firm can charge more than one price.

• Businesses can make additional profits if they charge different prices to different groups of customers.
• As we study market structure with monopolistic competition and oligopoly in the next two chapters, a thorough understanding of how price discrimination works is important.

• The difference in price is not the same as the difference in cost.
• "price discrimination" is beneficial to both sellers and buyers, even though it sounds like different prices to different things.

• Some consumers are able to buy a product at a low price because price- discriminating firms typically charge a "high" and a "low" price.
• Firms don't want to provide goods at low prices, they want to make money.

• They can make more money by dividing their customers into two groups: those who pay more and those who get a discount.

• Customers will likely buy elsewhere if a firm tries to charge a higher price.

• Both monopolies and nonmonopolistic companies use price discrimination to make more money.
• Movie theater tickets, restaurant menus, college tuition, airline reservations, discounts on academic software, and coupons are some examples of price discrimination.

• There are two conditions that must be met for price discrimination to take place.
• There must be at least two different types of buyers.
• The firm must be able to prevent resale.
• Let's take a look at each.

• The firm must be able to distinguish groups of buyers with different prices.
• Firms can make more money if they charge more to customers with inelastic demand and less to customers with elastic demand.
• Many restaurants offer early bird specials to people who eat dinner early.
• Retirees and families with children are on a limited budget.
• These early diners represent demand that is more elastic and they eat out only if the price is low.

• Early bird specials work by dividing customers into two groups, one that is price sensitive and the other that is willing to pay full price.

• A firm must be able to prevent resale of the product or service for price discrimination to be a viable strategy.
• It is easy to prevent resale.

• Airlines require that electronic tickets match the passenger's photo ID.
• A passenger who received a discounted fare can't resell it to another passenger who will pay more.
• The process works well for airlines and allows them to charge more to groups of flyers with more inelastic demand.
• It works well for restaurants that offer early bird specials because they can easily distinguish between customers who arrive in time and those who arrive later.

• Many good or service jewelry stores and automobile dealerships attempt to practice perfect price at a unique price to every discrimination by posting high sticker prices and then bargaining with each customer.

• The salesperson tries to determine the highest price you are willing to pay when you visit a store.
• He or she bargains with you until that price is reached.

• It is difficult to implement perfect price discrimination.
• Let's look at a hypothetical example.
• Flat Earth Air and Discriminating Fliers are small airlines.
• Each airline has a monopoly on the route it flies, and each faces the same market demand curves and marginal costs.
• The costs of running a flight are the same no matter how many passengers are on board.
• Both firms fly the same model of airplane.
• The cost of an extra passenger and a can of soda is very small.

• The marginal cost is shown as a horizontal line to make it easy to work with.

• Flat Earth Air uses the profit- maximizing rule to set its price.

• It charges $300 for every seat and serves 100 people.

• Every passenger who gets on the plane makes $200 in producer surplus because the marginal cost is $100.
• The profit is represented by the green rectangle in panel a.
• The air line has done everything it can to maximize profits at a single price.

• A firm that charges a single price earns a profit.
• The firm increases its revenue by charging some customers more and others less, as shown in the green areas.
• The increase in profit is partly offset by the loss of revenue from existing customers who receive a lower price, as shown in the red area.

• There is a lost opportunity to earn additional revenue.
• This is what Discriminating Fliers does.

• There are two prices shown in panel (b).

• Let's look at the reasons behind the prices.
• The airline can't sell every seat at the higher price because the firm faces a downward sloping demand curve.
• It saves a number of seats, in this case 50, for last- minute bookings to capture customers with less flexibility who are willing to pay $400.
• Travelers with inelastic demand are those who travel for business.
• The airline offers the rest of the seats at a low price, in this case $200, to capture customers with more elastic demand.
• The challenge for the airline is to make sure that people who are willing to pay $400 don't buy the $200 seats.
• The low fare is available to customers who book far in advance because they are more likely to shop for the best deal.
• It's common for a business person to visit a client just days before a meeting so they don't have to purchase a $200 ticket weeks in advance.

• The total number of passengers can be compared under the two strategies.
• 50 passengers who pay $400 and 100 additional passengers who pay $200 are served by Discriminating Fliers.

• The shaded areas of the panel show the net effect of price discrimination.
• Discriminating fliers makes more profit by charging two prices.
• Passengers who pay more than $300 for Flat Earth Air will get an additional $5,000 in revenue.
• If you are willing to take the red- eye, airlines offer lower fares.

• The lower green rectangle shows the revenue generated by the low price tickets.

• If the air line had charged a single price, some customers would have paid more.
• A group of customers willing to pay $300 are able to get tickets for $200.
• The lost profit is equal to the red rectangle.
• The dark green rectangles have more revenue and lost profit than the red one.
• The airline that price- discriminates makes a profit of $25,000.
• The airline that charges a single price makes a $20,000 profit.

• Many prices are charged by airlines.
• You will find higher prices for travel on Friday and midday flights.
• If you choose a red- eye flight, prices are lower.
• From hour to hour, airlines change prices from day to day.
• Efforts to price- discriminate are reflected in all of these price changes.

• Air lines can price discriminate because passengers can't resell their tickets easily.
• If an airline could charge unique prices for every passenger booking a flight, it would transform the entire area under the demand curve and above the marginal cost curve into more profit.

• The companies that practice price discrimination make a lot of money.
• It increases the welfare of society.
• More consumers are able to buy the good because a price discriminator charges a high price to some and a low price to others.

• Imagine an airline that is able to price discriminate.
• Each passenger is charged the same price as the passenger who is willing to pay.
• Some customers pay more and others less than they would under a single price system.
• The firm captures the profit at this price.
• Each passenger is charged a price based on their willingness to pay.
• It earns more profit.
• The firm is able to capture the additional profit in the upper green triangle by charging higher prices to those willing to pay more than $300.
• The firm is able to make more money and serve more customers by charging lower prices to those not willing to pay $300.

• Perfect Flights can increase the number of tickets sold to 200 by charging a different fare to every customer.
• Two results are worth noting.

• The profit in the light green rectangle is the most the firm can earn.

• The additional profit is represented by the green triangles.

• In the case of Perfect Flights, the last customer who gets on the plane will pay the lowest price you can find in a competitive market.
• Perfect Flights is achieving the efficiency of a competitive market while also producing the output that a regulated monopolist would choose.
• The area consisting of the two green triangles can be converted into more profit with this strategy.
• The process maximizes the quantity sold.
• The efficiency of the market improves.

• Water rationing is the norm if you live in an arid climate.
• One way to encourage water use is tiered pricing.
• Most markets give a volume discount for bulk purchases.
• People who use more water pay more for it.

• Santa Fe, New Mexico decided to use economics to address the issue of water use.
• Santa Fe's city government introduced a tiered pricing system fifteen years ago when the city almost ran out of water.
• The heaviest users pay four times more than modest users.

• Santa Fe's total water consumption has dropped by a fifth since 2001, even as the high desert city's population has increased.

• When water costs more, people respond by using less.

• The people of Santa Fe have a negative incentive to use too much water.

• Heavy water users in Santa Fe didn't have to pay extra for their actions before 2001.
• Heavy users are internalizing by paying more for water.

• The commons scenario where all the water runs dry is where Santa Fe has avoided a Tiered pricing.

• Santa Fe, New Mexico, implemented a tiered pricing system in 2001 and is currently facing a similar situation in California.

• The Santa Fe water pricing system splits groups by their willingness to pay, which is beneficial to society.

• We can compare the consumer and producer surplus in three scenarios: a competitive market, a market in which a monopolist charges a single price, and a market characterized by perfect price discrimination.
• The results are derived from Figure 11.

• There are no barriers to entry in a perfectly competitive market.
• The price will be the same as the marginal cost in the long run.
• The airline ticket price is driven down to $100 in our example.

• 200 tickets have been sold.
• The entire area above the marginal cost curve is consumer surplus because the willingness to pay is at least as great as the price.
• The producer surplus is zero because the ticket price is the same as the marginal cost.

• There is no deadweight loss because every customer can find a ticket.

• A monopoly holds a lot of market power, so the firm sets a price using the profit- maximizing rule, without having to worry about competition driving the price down to marginal cost.
• The amount of consumer surplus is reduced to triangle A and the producer surplus is equal to rectangle B.
• The total welfare of society is limited to A + B because of the deadweight loss associated with triangle C. The analysis shows that monopoly causes a partial transfer of consumer surplus to producers and a reduction in total welfare for society.

• In our third scenario, a firm that can practice perfect price discrimina tion is able to charge each customer exactly the same price as the customer is willing to pay.
• The firm can convert the entire area of consumer surplus that existed under perfect competition into producer surplus.
• To capture the entire area of available consumer surplus, the firm must lower some prices all the way down to marginal cost.

• These examples give us a better idea of what econo mists mean when they use the word "perfect" in connection with a market.

• Reese Witherspoon plays a sun- washed girl who defies expectations in this 2001 film.
• Believing that her boyfriend is going to propose to her, Elle and two friends go shopping to find the perfect dress.

• The saleswoman does.

• It's impossible to use a half- loop top discriminate, they look for clues to help them decide.
• The buyer's willingness to pay full price or need fabric would be questioned.
• An incentive, or discount, to make a purchase wasn't the only reason you got this in.

• It can mean that consumer surplus is maximized, as it is under perfect competition, or that producer surplus is maximized, as it is under perfect price discrimination.
• Calculating whether the benefits accrue to consumers or producers is not done by economists if society's total welfare is maximized.

• Every item can be found closer to home at an outlet mall.
• The same things are available nearby.

• Logic says that it would be more convenient to shop locally and not have to go to an outlet center.
• That is not how many people feel.

• A big deal is discount shopping.

• Here are some statistics.
• The most popular attraction in Virginia is Potomac Mills, located 30 miles south of Washington, D.C. Potomac Mills is not unique.

• Pigeon Forge, Tennessee, has over 10 million lion shoppers every year, more than the number of visitors to the Great Smoky Mountains National Park.

• There is price discrimination at work.
• Traditional malls are usually located in urban settings and offer a wide variety of choices.
• The local shopping mall is close to you.
• Shopping at a local mall is not the best way to get a bargain.

• The discounts make outlets attractive.
• The difference in the elasticity of demand between the two groups means that traditional malls can more easily charge full price, while outlets have to discount their merchandise to attract customers.
• Merchants can price discriminate on the basis of location if they separate customers into two groups and prevent resale at the same time.
• Retailers can earn additional profits through price discrimination, while price sensitive consumers can find lower prices at the outlets.

• The table below shows seven potential customers who are interested in taking a helicopter ride.
• There is room for eight people in the helicopter.
• The cost of taking on more passengers is $10.

• An ordered array of the customers will be created from those willing to pay the most to those willing to pay the least.

• Chuck will take the flight if the firm charges $100.
• Chuck and Amelia both buy tickets when the firm drops the price to $80.
• Lower prices result in higher revenue for the first five customers.
• The firm will benefit from lowering its price if the increase in marginal revenue is greater than the marginal cost.
• Five customers get on the helicopter for a total of $250 in revenue when the price is $50.
• $50 is the best price to charge since the fifth passenger brings in $10 in marginal revenue.
• Each of the five passengers has a marginal cost of $10, so the company makes $250 - 5 * $10, or $200 in profit.

• The customers should be arranged into two groups: adults and children.

• You can see that there are two different prices.
• At a price of $70, profits are maximized for adults.
• The total profits are maximized for children.
• In total revenue, the company should charge $70 to the adult customers.
• The company should charge $40 for each child under the age of 18.

• The company makes $210 + $120 - 6 * $10, or $270 in profit.
• This is an improvement over a single price.
• Under the single- price model, only five passengers are allowed to get on the helicopter.

• One of the most interesting topics in economics is price discrimination.
• There are examples of price discrimination at movie theaters and on college campuses in this section.
• Some of the forms of price discrimination are easy to describe and others are more nuanced.

• The price of a movie is determined by the time of day, age, student status, and whether or not you buy snacks.
• Let's look at pricing techniques to see if they work.

• In order to encourage customers to attend movies in the afternoon, theaters discount ticket prices.

• The strategy makes sense because customers who can attend matinees,retirees, people on vacation, and those who don't work during the day have less demand or are more flexible.
• The options for other potential customers are limited by work and school.
• In order to encourage people to watch at a less crowded time, theaters discount their prices.
• Movie theaters discount the price of matinee shows because they pay to rent films on a weekly basis, so it's in their interest to show a film as many times as possible.

• Even with a relatively small audience, the theater can make additional profits because the variable cost of being open during the day is limited to paying a few employees relatively low wages.
• On weekends, there is a discount when the doors are open and families want to see a movie together.

• Theaters charge two different prices based on showtime because they can easily distinguish between high demand customers and price sensitive customers who want to see a show at a later time.
• Those with less flexible schedules have to pay more for tickets in the evening.

• This is not a simple question.
• The discounts that the young, the old, and students receive are not fully explained by income.
• Movie attendance goes down with age.
• It's not surprising that "child" discounts are phased out at most theaters by age 12.
• Senior discounts start at 50.
• You might think that discounted ticket prices for people in their 50s would be a bad idea.
• The "senior" discount provides an incentive for a population that might not otherwise go to a movie theater because interest in going to the movies declines with age.
• Price discrimination based on age does not always work well.
• It can be hard to tell the difference between a child who is under 12 and one who is over 12 in a theater.
• Age or student status is a useful revenue- generating tool because of price discrimination.

• Movie theaters practice price discrimination in the concession area.
• We need to think of two groups of customers, those who want to eat while they watch movies and those who don't.
• Movie theaters push people with inelastic demand for snacks to buy from the concession area by limiting outside food and drink.
• Some customers with elastic demand will still sneak food into the theater.
• The theater will make more money if some people are willing to pay more for concession fare.

• Movie theaters can't prevent snacks from being smuggled in.

• If you've ever smuggled food into a movie theater, it's because of theelastic group of concession- area snackers and the price of the remaining empty seats.
• The problem we examined with airlines was similar to this situ movie theater concessionation.
• The seats are empty.

• The experts at price discrimination are colleges and universities.
• Think about the cost.
• Some students pay the full sticker price, while others don't.
• Some students get the in- state rate, while out- of- state students pay more.
• There are discounts for students when you get to campus.
• Many ways in which colleges and universities differentiate their students are considered in this section.

• Most families complete the Free Application for Federal Student Aid before setting foot on a college campus.
• Eligibility for federal aid is determined by the form.
• The tuition cost for low- and medium- income families can be lowered with the help of grants and low interest loans.
• The college can separate applicants into two groups based on income.

• Many state institutions of higher education have a tiered pricing structure.
• State students get a discount on tuition, while out- of- state students pay more.
• State subsidies are intended to make in- state institutions more affordable for residents.
• In- state students pay less because their parents have been paying taxes to the state for many years, and the state uses some of those tax dollars to support its system of higher education.
• State subsidies only explain the difference in pricing.
• If all students paid the same price, out- of- state students would be less sensitive to price than in- state students.

• Two rate groups of customers with different elasticities of demand are created by this two tiered pricing structure.
• Students choose an out- of- state college or university because they like what that institution has to offer more than the institutions in their home state.
• It's possible that a program is more highly rated or that they prefer the location of an out- of- state school.
• They are willing to pay more for the out of state school.
• Out- of- state students have more in demand.
• One way to help pay for a beautiful campus is in- state.

• It is not surprising that in- state demand is more elastic because price is a big factor in choosing an in- state institution.

• The price discrimination game is played by private colleges that charge over $60,000 for room and board.
• The "sticker" price is often discounted.
• The tuition can be discounted all the way to zero if the college wants a particular student to attend.
• This strategy allows private colleges to price discriminate by offering scholarships based on financial need, while also guaranteeing placement for the children of wealthy alumni and others willing to pay the full sticker price.

• The edge of campus is a good place to look for price discrimination.
• College students are often offered discounts at local bars, eateries, and shops.

• Think about the average college student.
• Local merchants in search of college students can give student discounts without lowering their prices.
• They can charge more to their regular clients and give college students discounts if they make the trek off campus.

• The price of a movie is determined by the time of the movie and the age of the customer.
• In order to practice price discrimination, theaters have to be able to identify different groups of movie goers, where each group has a different price elasticity of demand.

• The demand for matinees is low.

• As you craft your response, think about the movie theaters.

• Think about the examples below to test your understanding.
• Programs such as discount coupons, rebates, and frequent buyer plans appeal to customers willing to spend time pursuing a deal.

• Priceline can be used to make hotel reservations.
• "Naming your price" on Price line.com allows users to get hotel rooms at a discount.
• Hotels negotiate with Priceline to fill unused rooms while still advertising the full price on their websites.

• Customers who buy a $6 footlong get more sub at a substantially lower price than those who buy a $4 6-inch sub.

• Customers who order off the McPick 2 Menu get a variety of smaller menu items for $1 each.

• Many retailers give first dibs on a limited quantity of discounted items to customers who line up in the early morning hours after Thanksgiving.

• Customers with lower incomes usually take more time to get the discount.
• Coupons, rebates, and frequent- buyer programs do a good job of pricediscriminating.

• Priceline can be used to make hotel reservations.
• Hotels can divide their customers into two groups, those who don't want to be bothered with haggling and those who value the savings enough to justify the time spent negotiating.
• This is an example of price discrimination.

• Anyone can get the $6 price.

• The $6 footlong does not meet the definition of price discrimination.
• Customers need to buy a 12-inch sub to get the deal.
• Only those with big appetites or willingness to eat leftovers will choose a footlong.
• The price for a 6-inch sub is $4 for those with smaller appetites.

• Anyone can buy off the McPick 2 Menu.
• This isn't price discrimination because McDonald's doesn't force customers to buy large serving in order to get the deal.

• The discounts are time consuming.
• Shoppers who arrive before the deadline get a lower price than shoppers who arrive after the deadline.
• This is an example of price discrimination.

• Each time they visit the store, the returns can be hundreds of dollars.

• Some people keep food for when they coupon.
• Most of the space in their homes is taken up by saving $200.
• It takes 20 spreadsheets, folders, and calculators to determine hours to do at the store, so it's the equivalent of $10 to save as much as possible.

• As good economists, we know that getting a really good deal on something doesn't mean they have organizational skills to use in the workforce.

• It is for this reason that many households do couponer, which is equivalent to a part time not clip coupons in the first place.
• The participants don't account for money.

• There is price discrimination on campus.
• Students receive discounts for campus activities.

• Pricing discrimination gives students more access to campus events than charging a single price.

• Charging different prices to different groups of customers results in more economic activity and is more efficient than charging a single price across the board.
• Many consumers pay less than they would if a firm charged a single price, while other consumers will pay more because their demand is more inelastic.
• The amount of deadweight loss in society is reduced.

• There are instances of perfectly competitive markets and monopoly that are rare.

• The right balance of men and women is needed in clubs.
• Women can get in without a cover charge because demand is more elastic.
• Men have to pay the cover charge because demand is moreelastic.
• The result is win/win for everyone.
• When women get in for free, the club's profit increases because it is more crowded.

• Firms can prevent resale among their customers by discriminating between different groups of customers with different price elasticities.

• Before a firm can charge more than one price, it must have some market power.

• Some consumers pay a higher price while others get a discount.
• Price discrimination leads to a higher output level and reduces deadweight loss.

• We looked at the shopping experience in the context of price discrimination.

• You need to keep your budget in check.

• There are some things you can do to save a few dollars.

• Understand how the store works.

• The grocery store is trying to get you to purchase the difference when you buy more items than you need.
• You are in the store.
• You can get a gallon of milk for one item.
• In most stores, you shouldn't have to worry about the other refrigerated section being in the back if you have purchases.

• Coupons don't always look good.

• Popular items are placed at eye level.

• If you have to pay full price to use from manufacturers.
• Store facturers pay "slotting fees" to have their products brands or other brands of the same product placed in desirable locations.
• You use a coupon for the product.

• You can try the store brands.
• It's a good idea to look up and down when buying store brands.

• Stores know that shoppers prefer sales and markdowns over the name brand.
• Many shoppers don't know if the sale is for less when they buy at the manufacturing plant.
• You can save a lot of money when this is the case.
• Don't buy something just because it's money.

• There is a sale at the end of the aisle.
• Get a smaller shopping cart.
• Most shoppers ration their purchases when their carts make extra money because they end up filling up.

• They pick up traffic to the store.

• If you're aware of the tactics that grocery stores use to lose money, then you should.

• The store's management is counting on a game.

• Seven people are interested in seeing a movie at the theater.

• There are examples of price mizing revenue.

• The student section for all basket games is $5.

• A music store is having a sale on guitars.

• Grace 9 14 customer fee is under the customer's maximum willingness to pay for lessons.

• There are three products for which impatience is available first.

• Is this an example of price for U.S. citizens?

• The Metropolitan Opera tickets are the most popular on the top page of the results.
• PC users are often presented with a limited number of student rush tickets with prices.

• The students who have States are increasingly buying prescription drugs outside of the United States.
• Pharmaceutical companies charge three to discount because of elastic demand and low income.
• The Met is able to price drugs four times more than in other countries because they require a student ID.
• Other groups of operagoers are unable to buy the rush tickets because of the drug industry's efforts to price.
• The discrimination isn't working, but that isn't practice that separates the customer base true.
• Some people fill their prescriptions into two groups.

• Students are ideal rush customers because they are hard working.

• Some opera companies are benefiting from price open up the rush tickets to seniors, another discrimination, even though some consumers group that is easy to identify and generally has manage to navigate around their efforts.

• As a college student, you probably don't have a lot of money to tip the restaurant host, but not every show sells out, and some tickets have a lot of money on them.
• If it becomes available at the last minute.
• The opera com would benefit from the dent rush tickets that you have the money for.
• The company can fill you seated sooner and avoid the wait time because of your tip.

• Saving time is money.
• The host has an incentive to let nontippers in sooner, and that's good for the host.

• It's good for the business because when the restaurant has more inelastic demand and tables are faster, the restaurant makes more money from customers who spend more money.