ECONOMIC ANALYSIS

Economic Analysis and Modern Problems as well as the Economic way of Thinking

Economic Analysis and Modern Problems as well as the Economic way of Thinking

A price discrimination strategy that will increase your revenues compared to a single-pricing strategy.

For a nonordinary monopoly, price discrimination is an important subject to investigate. There are mainly two sets of characteristics, quantity and identity, on which the monopolist may be able to discriminate in setting up different prices. In first-degree price discrimination, the monopolist charges different per-unit prices for different consumers or different groups of consumers, but this per-unit price is independent of how much the consumer purchases.

Under first-degree price discrimination, we can separate the firm's profit maximization problem into different cost per unit for different consumers or different groups of consumers, and in each separated market, here the problem is equivalent to an ordinary monopoly problem with different market demands. In second-degree price discrimination, the monopolist is unable to set different prices for different consumers or different groups of consumers but can set different prices for different quantities any consumer buys. Volume discounts represent a case of second-degree price discrimination.

If the monopolist can set different prices for different consumers and for different quantities, the practice is referred as to third-degree price discrimination or perfect price discrimination. With any form, the firm will have a higher profit than its counterpart in an ordinary monopoly.

Price Ceiling

The market process described above assumes that market participants are each making decision based on their own self-interest. Periodically, a market's equilibrium price and quantity are viewed by some market participants as undesirable. When this happens, participants on one side of the market may lobby for government intervention. If, for example, consumers believe the market equilibrium price is too high, they may lobby for governments to impose a price ceiling.

A price ceiling is a legally established maximum price intended to lower the price below the market equilibrium price. If government agrees to establish an effective price ceiling, the ceiling will be established below the equilibrium price, as illustrated in Figure

Recall that when market price is below the equilibrium value, the resulting shortages cause prices to increase toward the equilibrium. However, when a price ceiling is established, the ceiling price is a maximum price, and sellers cannot legally charge a higher price.

As a result, the shortages created by the price ceiling are persistent and an expected long-term outcome resulting from the price ceiling. Price ceilings thus have interesting policy implications. In choosing to protect some consumers from the unwanted market price, the government is also choosing to deny other consumers access to the product as a result of the shortage. In general, economists do not recommend implementation of price ceilings because of the resulting persistent shortages.

Concluding the above scenario, markets for all goods and services have two sides: buyers and sellers. The interaction of the buyers and sellers, all acting in their own self-interest, establishes an equilibrium price and ...