ECON 356

In Class Exercise Thirteen - The Mainstream Model of Monopoly - Price Discrimination

1.  Why don't firms use third degree price discrimination every time there are different market segments they are selling their product to?

2.  Graphically explain how a firm decides output and price decisions between two different markets (that the firm is selling the same good to).

3.  The prices charged by supermarkets in poor, dangerous, and ill-kept urban areas are very often higher than those charged by the same stores in high-income and well-policed areas of the same city.  Such cases are often cited as examples of price discrimination against the poor.  Analyze this allegation.

4.  Pharmaceutical companies in the United States have been accused of "dumping" (selling in foreign markets for prices below what they sell in the U.S.).  Can you explain why they do this using the theory of price discrimination?  What degree is this?

5.  Explain graphically and in words why a firm using first degree price discrimination can capture all consumer surplus (theoretically).  Why is this not possible in the real world?

6.  How much can a second degree price discriminating firm capture of consumer surplus?  Graph?

7.  Block Booking Case (variation of a tie-in sale):

Assume there are two movies put out by a movie production company.  One is a "big hit" and the other is a "so-so" movie.

There are two theatres:  Nighthouse and Dayhouse

The maximum prices they will pay per week for films are: (BH = big hit, SS = so-so)

Nighthouse:  $12,000 = PriceBH, $3,000 = PriceSS

Dayhouse:  $8,000 = PriceBH, $4,000 = PriceSS

Nighthouse will pay more for BH than Dayhouse, but less for SS.

a.   If the movies are sold separately at a uniform price (same price to both theatres), at what price must they sell?  How much revenue would the movie production company make (if these are the only two customers)?

b.  If block booked - would the movie house make more or less?  Explain.

c.  Explain why this is considered price discrimination.

8.  A real world example: 

The Asian Wall Street Journal is printed daily in Hong Kong, Singapore, and Tokyo for same-morning delivery.  The newspaper charges widely varying prices in the three cities.  A business newspaper is particularly suited to discrimination by location.  Few business people are interested in trading off a lower price for old news.  Hence, the Asian Wall Street Journal can maintain a price in Tokyo that is more than double that that in Singapore.

Prices (May 2006):  12 month subscription - HK$2,700 ($348) in Hong Kong, S$525 ($331) in Singapore, and Yen94,500 ($845) in Tokyo.

a.  explain these price differences.

b.  the Wall Street Journal Interactive Edition charges the same price of $99 for a 12 month subscription to every subscriber.  Generally, retailers of items that are both sold and delivered over the Internet have not been able to discriminate on price.  Why?