7.2.2 Price discrimination in Monopolies

If monopolists have the possibility of price discrimination, i.e., the ability to charge different prices from different customers, they will take advantage of it to better exploit consumers’ willingness to pay. Typical examples of such behavior are staggered consumption or different qualities of a product.

For example, films are offered for sale or download at a high price shortly after their release and at a much lower price after a few months. At some point, they are available in the package offer of a provider or on television for almost zero cost. Thus by staggering the release over time, the seller of this product can draw on the varying willingness to pay of different customers. Those who cannot wait to watch the movie will pay quite a high price to get it right after the release. Those who are not willing to buy the movie at a high price will watch it later.

Online sales are another area that offers great opportunities for price discrimination. Amazon, for example, comes quite close to a dominant, i.e. monopoly-like, market position, and online sales offer ideal conditions for exploiting the willingness to pay. Prices are displayed to each consumer individually when they look at an offer, so they can easily be changed and customized at any time. In addition, it is difficult to compare the prices of products displayed to each consumer, i.e. consumer A cannot see what price consumer B pays for the same product. It is therefore not surprising that Amazon deviates from the classic market equation "one product = one price", and suggests different prices to customers changing them frequently, sometimes several times a day. The only thing Amazon needs to exploit the willingness to pay is information about which customer might be willing to pay higher prices. This information typically comes from customer history, general market data (e.g. certain times such as vacations or public holidays, the weather, etc.) or individual data collected via cookies. For example, a potential buyer who checks an offer via an Apple product has a higher willingness to pay and may, for this reason alone, be shown higher prices or higher-priced alternatives get displayed first in the search results list. This knowledge on how to get the most out of the customers accounts for much of Amazon’s value.

In the graph, it is possible to add twice a different price to show the effect on profit. Here, we don’t consider potential additional fixed costs that might incur as a result of the change in production or distribution (marketing). If the "Price Discrimination" button is pressed a third time, one sees the result of complete price discrimination, where the monopolist completely exploits the willingness to pay of each individual consumer. However, this extreme case cannot be achieved in reality.

(c) by Christian Bauer
Prof. Dr. Christian Bauer
Chair of monetary economics
Trier University
D-54296 Trier
Tel.: +49 (0)651/201-2743
E-mail: Bauer@uni-trier.de
URL: https://www.cbauer.de