12 -- Part 2: Monopolistic Competition and Advertising
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.