1. Price Discrimination Cartoon
Interview Style.
Hi, my name is Bill Gates, the current
chairman of Microsoft which is the world’s
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?
That’s 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.
2. 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 printing costs between
the two is very little compared to the
difference in price but it is based on the
willingnessof the customer to pay. The
'eager' fans will pay more at first than
those who wait.
3. But Bill, how do
you know a
customer’s
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.
4. Cinemas price
Airlines also price
discriminate by
discriminate by
offering different prices When a firm offers a
dividing customers into
to children,adults and discount the also price
personal and business
senior citizens because discrimiinate. They can
travellers. Business
they know seniors do this by offering
travallers have a higher
citizens and children coupons or lower
willingness to pay. Also
have a lower prices to those that
the time of year will
willingness to pay. The buy higher quantities
affect the price as
price of providing the of a good.
well.e.g at Christmas
seat is the same for
time prices go up.
everyone.
6. Public Policy Toward Monopolies
Are Monopolies a
good thing? And if not
how can you respond
to them?
Hi Jack! I am 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:
7. 1.More 2.Regualte
Competitive Behaviour of the
Industry Monopolies
3.Public 4.Doing Nothing
Ownership at all
H Jack! I’m Michael O’Leary, the CEO of Ryanair. I am
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.
8. How and why would a
Government do that?
Well Jack, take for example how, 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 Authorities co-
operate with each other and with the Eu Competition
Commission through the ECN( European Competition
Network). Take a look below Jack!
The ECN
National Other National EU
Competition Competition Competition
Authorities. Authorities. Commission.
9. Ah I see how the ECN
works now! Thanks
Michael!
Take a look at this
video from Financial
News about the
takeover bid!
http://www.youtube.com/watch?v=S4rZ_-dKxlw
But how are these
competition laws
enforced Michael?
10. All National Competition
Legislation has to be in line with
EU Legislation overall.
Cross border cases are dealt
with by EU Law
And what do these
laws cover Michael?
Below is an easy to read
diagram to help you
understand the areas
covered by law.
11. Against Cartels
which prevent
Free Trade.
To Ban anti- Monitor and
competitive Examine
price Acquisitions
strategies such and Joint
as price fixing. Ventures.
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 backto explain the second
way governments can respond
to a monopoly and that is
through Regulation!
12. 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 regulate their
prices and stop them charging the
price they want!
13. 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?
14. And how does the
government set
this price Enda?
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!
15. For a Natural Monopoly
AVERAGE COST > MARGINAL COST
So how does
the regulator
respond to this
price problem?
They can
SUBSIDISE the
monopolist.
But how do they raise
the money to pick up
the losses from this
marginal cost pricing?
16. They raise money through
TAXATION.
Firms in a Competitive Market benefit
from lower costs because this leads to
higher profits.
However when costs fall for a
monopoly the regulator will reduce
the price so there is no incentive for a
monopoly to lower costs.
17. Public Ownership of a Monopoly
So far Jack we have looked at two
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 third
way Enda?
Public Ownership
18. Oh yes I know that this
is called a nationalised
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.
19. Doing Nothing
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.
20. Okay Enda so now that we
have discussed a monopoly I
think I can draw some
conclusions about them!
Inefficiences can be mitigated
Charge prices above marginal
through Price Discrimination
cost , causing deadweight
or by Policy Makers like the
losses.
Government.
Monopoly
Monopoly power is limited
Downward Sloping Demand because they cannot raise
Curve. prices too much because of
substitutes.
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!
22. Many Firms
Cannot earn
economic
MR=MC
profits in the
long run.
Price
Discrimination Price=MC
not Possible
Monopoly
23. One Firm
Can earn
economice
MR=MC
Profit in the
long run.
Price
Discrimination Price > MC
is Possible
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!
