A monopoly can price discriminate between two groups of consumers if it can identify them and if it has some market power with respect to each group. The two groups might be distinguished by their willingness to pay for the good, by their location, by their time of purchase, or by any other relevant characteristic.
What is a monopoly?
A monopoly is a firm that is the only seller of a good or service. The monopoly has market power because it faces no competition. A monopoly can price discriminate between two groups of consumers if it has the ability to distinguish consumer willingness to pay and if it has the ability to maintain separate markets across the two groups.
What is price discrimination?
Price discrimination is a pricing strategy that charges different prices to different groups of consumers. Price discrimination can be used to increase profits by charging consumers different prices based on their willingness to pay. The key to successful price discrimination is finding a way to segment consumers into groups that are willing to pay different prices.
There are three conditions that must be met in order for price discrimination to be possible:
- The seller must have some market power. This means that the seller must be able to set prices and influence the quantity of goods sold in the market.
- The seller must be able to segment consumers into groups that are willing to pay different prices.
- The seller must be able to prevent resale between groups. This means that the seller must be able to prevent consumers in one group from selling the good or service to consumers in another group.
How do monopolies price discriminate?
There are a few different ways that monopolies can price discriminate. The most common way is through using different prices for different groups of consumers. This means that the monopoly will charge a higher price to one group of consumers, and a lower price to another group of consumers.
The other way that monopolies can price discriminate is through using a two-part tariff. This means that the monopoly will charge a fixed fee for entry, and then an additional fee for each unit consumed. The two-part tariff allows the monopoly to extract all of the consumer surplus from the market.
Discrimination across groups can also happen if the monopoly has different prices in different geographic areas. This could be because of transportation costs, or because of different demand in different areas.
Finally, discrimination can happen if the monopoly has different prices at different times. This could be because of seasonal demand, or because the monopoly knows that some customers are more price sensitive than others.
A monopoly can price discriminate between two groups of consumers if it can identify and separate the two groups, and if it has some market power. In this section, we develop a theoretical model to study how a monopoly can price discriminate across two groups.
In order for a monopoly to price discriminate successfully, it must make two assumptions. First, it must assume that it can identify which consumers belong to each group. Second, it must assume that it can prevent consumers from switching groups. If either of these assumptions is not met, then the monopoly will not be able to price discriminate successfully.
The theoretical model that we will be using to analyze monopoly price discrimination is the Consumer Surplus Model. This model allows us to see how much consumer surplus a firm can generate by price discriminating between two groups of consumers.
We will be using the following assumptions in our analysis:
-There are two groups of consumers, group A and group B, with different willingness to pay for the good or service being offered by the monopolist.
-The monopolist canPerfectly price discriminate across the two groups.
-The monopolist is profit maximizes.
Under these assumptions, we can see that the monopolist will charge a higher price to group A than to Group B. The consumer surplus for group A will be lower than the consumer surplus for Group B.
A variety of empirical evidence supports the assertion that a monopoly can price discriminate between two groups of consumers if it has market power across the two groups. In a classic article, Joe S. Bain (1968) reported that U.S. Steel was able to price discriminate between its customers in the market for hot-rolled steel products.
Case Study: Microsoft
Empirical Evidence: In Microsoft’s case, the two groups of consumers are “content” providers and “application” providers.
Content providers are the original sources of the content that users consume on the web. They include news outlets, video creators, and social media platforms. Application providers are the companies that make the apps and services that users interact with on their devices. These include companies like Uber, Lyft, and Airbnb.
Microsoft has been able to price discriminate between these two groups of consumers because it has a monopoly on the Windows operating system. By controlling the operating system, Microsoft has been able to impose higher costs on application providers while keeping content providers relatively free from charges. This has allowed Microsoft to extract more revenue from application providers, which it has then used to subsidize content providers.
This pricing strategy has been successful for Microsoft because content providers generate a lot of traffic, which brings in advertising revenue. Meanwhile, application providers tend to be less popular with users and generate less traffic. As a result, they are less valuable to advertisers and generate less revenue for Microsoft.
Case Study: De Beers
De Beers is a classic example of a monopoly that successfully price discriminated between two groups of consumers. For many years, De Beers controlled the world supply of diamonds, and was therefore able to charge higher prices to consumers in developed countries who were willing and able to pay more for diamonds than consumers in developing countries.
From the above analysis, we can see that a monopoly can price discriminate between two groups of consumers if it has market power and if there is a difference in the elasticity of demand across the two groups. If the monopoly does not have market power or if there is no difference in the elasticity of demand, then it will not be able to price discriminate.