Page 333 - The Principle of Economics

In reality, of course, price discrimination is not perfect. Customers do not walk into stores with signs displaying their willingness to pay. Instead, firms price dis- criminate by dividing customers into groups: young versus old, weekday versus weekend shoppers, Americans versus Australians, and so on. Unlike those in our parable of Readalot Publishing, customers within each group differ in their will- ingness to pay for the product, making perfect price discrimination impossible.
How does this imperfect price discrimination affect welfare? The analysis of these pricing schemes is quite complicated, and it turns out that there is no general answer to this question. Compared to the monopoly outcome with a single price, imperfect price discrimination can raise, lower, or leave unchanged total surplus in a market. The only certain conclusion is that price discrimination raises the mo- nopoly’s profit—otherwise the firm would choose to charge all customers the same price.
EXAMPLES OF PRICE DISCRIMINATION
Firms in our economy use various business strategies aimed at charging different prices to different customers. Now that we understand the economics of price dis- crimination, let’s consider some examples.
Movie Tickets Many movie theaters charge a lower price for children and senior citizens than for other patrons. This fact is hard to explain in a competitive market. In a competitive market, price equals marginal cost, and the marginal cost of providing a seat for a child or senior citizen is the same as the marginal cost of providing a seat for anyone else. Yet this fact is easily explained if movie theaters have some local monopoly power and if children and senior citizens have a lower
“Would it bother you to hear how little I paid for this flight?”
CHAPTER 15
MONOPOLY 339