Eco/372 Week 6

The monopolist’s profits could be increased in certain circumstances by a practise known as price discrimination (price discrimination occurs when the monopolist chooses to split the output up and sell it at different prices to different customers) (Bamford et al., 2002:172).

In day to day activities, price discrimination can be witnessed at a variety of locations. For instance, McDonalds offers a discount for senior coffee, if it is requested. Price discrimination can be described as identical goods or services being sold at different prices from one single provider (Sexton). In addition, in order for a good or service to qualify for price discrimination, three characteristics are provided. First, a business must operate as a monopoly, providing that the same good or service is not sold by someone else. Secondly, it is necessary for the organization to operate under the elasticities of demand, and thirdly, the organization must have provisions that avoid the possibility of the good or service

“Price discrimination exists when two similar products which have the same marginal cost to produce are sold by a firm at different prices. This sort of practice is highly controversial in terms of its impact on both consumers and rivals” (Price Discrimination, 2006, p.1). There are many ways to accomplish these sort of conditions because the transactions surely need not be simultaneous; indeed, there is temporal discrimination, such as between Sunday rates and week, day rates, matinee and evening prices, peak rates and off-peak rates, season and off-season prices. To sell different qualities or products with different marginal cost at the same price, or to buy different qualities or factors of different efficiency at the same price, is also discriminatory.

Ways to Increase Product Differentiation. One way to increase product differentiation based on a monopoly market structure is to categorize the market into elastic and inelastic groups. The example given in the book separates small business and students when selling a software package. Small businesses represent the inelastic group; they have the money to purchase software packages at a higher price and students are the elastic group and do not have the income to

Price discrimination can be analysed using the concept of MC and MR. The firms need to allocate production between the two markets so that the MR is identical for each market if it is to maximise profit.MR in market A is higher than MR in market B. By switching products from B to A, the firms can increase its revenue from a given output.MR in market B will now rise because it can charge a higher price if it sells less.MR in market A will fall because it has to lower price to sell more. For example, if MR in

The steeper the demand curves the better the discretion in pricing. Some businesses, during the day to day running of business, may choose to have a nonchalant or unconcerned approach to its competitors, ignoring the competitors’ market-related decisions can have detrimental consequences in securing the businesses’ place in the market structure is disadvantages, depleting instead of maximizing its profit and revenue. Managers must be diligently aware of their company’s competition at all-times to maximize profitability possibilities. “Managers, of oligopolistic competitive firms may engage in open price (or design-, service-, promotion-) warfare or other predatory or even criminal behavior to the end of eliminating competitors so that monopoly (or more-limited oligopoly) position can be achieved (Chapter D4, Oligopolistic Competition).

In the demand analysis for the product of this particular firm, we have found that the price elasticity of demand is 1.2. This implies that with a 1% rise in price, quantity demanded falls by 1.2%. Therefore, the expenditure on the good remains almost the same. The firm cannot hope to increase market share by decreasing the price. The revenue earned by the firm will remain the same whether it increases or decreases the price as the demand is almost unitary elastic. There is a fair amount of competition. The elasticity with respect to the price of the close competitor’s product is 0.68. This is less than one. With 1% increase in price of the competitor’s product, there is a 0.68% (<1%) increase in demand for the incumbent’s product. That means the demand for the product is not very sensitive to change in the price of the close substitute. This interpretation of the cross elasticity points to the existence of significant differentiation in the product. Even with a fall in the price of the close competitor’s product, the demand does not fall to a large extent. The two elasticities point to the fact that there is a preference for the firm’s product. The discussion above suggests that the market is characterized by monopolistic competition. There is limited scope for price competition. The firms mainly compete through advertisements and product-differentiation.

However, there are some conditions for firms to be able to price discriminate. Firstly, the firm must have price setting power and a degree of monopoly power. If they don’t have market power than they wont be able to charge consumer more than the competitive price. Secondly, the firm must be able to clearly identify sub-markets that have different elasticities of demand. By knowing that firms can raise price to those consumers that have inelastic demand and lower the price for those who have elastic demand to increase firm’s revenue. And lastly, these sub markets must be able to kept separate at minimal cost, with little ability for consumers to seep from the more expensive to the cheaper market. There need to be minimal arbitrage or resell, if people can buy the product in a low price sub-market and then re-sell it in a higher priced sub market, price discrimination will not be completely effective.

Markets are typically divided into four sectors; perfect competition, pure monopolies, monopolistic competition and oligopolies. There are two factors that influence which sector an industry fits into, one being the number of competing firms and the other being barriers to entry. Commensurate with these are different pricing options and strategies undertaken by various firms to reach optimal profit maximization. Altogether, each market contains specific intricacies which effect supply and demand and ultimately management’s response to each. Competition fuels growth, and while one market might regulate competition by its very nature, other markets must carefully weigh the cost of competition and what other firm’s reactions to it might be. Regardless of which market a business fits into, managers ultimately care about profit maximization which occurs at different levels defined by supply and demand. The following discussion highlights differences between each segment and how management must interact with the market in order to succeed.

There are few sellers but endless abundance of buyers. When one seller decides to alter their pricing strategy, it will affect its competitors to alter their strategies. Apparent today with the U.S. automotive industry however, due to their unwillingness to change with their competitors overseas, the “Big 3” General Motors, Ford, and Chrysler have fallen into financial peril. The Internet changed the way some industries that were once extreme oligopoly operate. The music industry which was once dominated by a handful of companies has new competitors in the market.

Uniform pricing does not generate the maximum possible total revenue because it generates consumer surplus (Thomas & Maurice, 2013). Consumer surplus is the area under demand and above market price over the range of output sold in the market (Thomas & Maurice, 2013). Managers devise pricing schemes to capture consumer surplus and turn it into profit (Thomas & Maurice, 2013). A firm charges different prices for the same product to increase profits which is called price discrimination (Thomas & Maurice, 2013). There are different groups of buyers with various elasticities of demand and are therefore willing to pay different prices. The definition of price discrimination requires the exact same product be sold at different prices and the cost must be the same for each market (Thomas & Maurice, 2013).

Within monopolistic firms there are a large number of organizations that operate within the industry which are independent from each other. The decision of one firm in the market has no significant effect on the demand curves of its rivals. There is also freedom of entry into the industry. The firms within an industry offer product differentiation, where one firm’s product is amply diverse from its competitor 's products, in order to allow raises in price without customers converting to alternate products.

Price discrimination is defined as charging customers a different price for the same product. One major factor of price discrimination is elasticity of demand. Elasticity of demand measures the percentage of change in quantity to percentage of change in price. If the percent of change is greater than one, it is elastic. On the other hand, if the percentage of change is less than one, it is inelastic. For customers who are not price sensitive, or the demand is elastic, when using price discrimination, the price would rise. The price would be lower for customers who respond more to changes in price, or the demand is elastic. Whenever price discrimination is possible, it can be highly profitable for a business.

The network effect is what creates the aspects of a network good. The network effect refers to the fact that the more people use something, the more value it has. There are four main types of network effects: direct, indirect, two-sided and local. Direct network effect is simply defined as increased use means increased value. Indirect network effects refers to

Setting a different price for the same product in different segments to the market. For example, this can be for different ages or for different opening times, such as cinema tickets. Market orientated pricing is also a very simple form of pricing used by very new businesses. What it involves is, setting the price of your product/service according to research conducted on your target market.