LIST 3: PRICE DISCRIMINATION AND PRODUCT SELECTION

1) A monopolist with variable cost function given by and fixed

costs equal to 40, sells a product at a unique price (no discrimination) in a market where
there are two groups of consumers with the following demand functions
and . Obtain the price and the quantity sold in this market and the quantity
sold to each group of consumers and the profits obtained by the monopolist. If we
assume perfect arbitrage within consumers of the same group but, however, the
monopolist can perfectly distinguish between consumers, would the monopolist obtain
more profits with or without price discrimination?

2) A monopolist has a total cost function given by and provides a

good to a market with an inverse demand function given by p=910-12Q. Calculate the
percentage increase in firms’ profits when firms could discriminate prices in two parts
(one for each of the two parts in which the quantity supplied by the monopoly is
divided) compared to the situation where there is no price discrimination.

3) A monopolist with total cost function C(Q)=8Q+6 provides a good in a market with
a demand given by Q=1000-50p and observes that first degree price discrimination can
be implemented. Obtain the quantity produced, the profits and compare it with a
situation without price discrimination.

4) Assume that a monopoly observes that its market is segmented in two groups of
consumers with the following demand functions and . Its
total production costs are C(Q)=20Q+2. Assume there is perfect arbitrage within the
consumers of the same group but still the monopolist can perfectly distinguish between
consumers. Discuss if price discrimination is possible and compare the solution (profits)
with a situation without price discrimination.

5) A monopolist has a unique consumer with a demand function given by Q=74-p.

There are no production costs.
a. Which is the optimal price setting for the firm under a linear tariff scheme? And with
a two-part tariff? Compare both cases in terms of social welfare.
b. Assume we have now two types of consumers (the proportion of consumers of each
type is equal to 0.5) with demands given by and . Assume there is
perfect arbitrage within the consumers of the same group and moreover, the monopolist
can perfectly distinguish between consumers. Which type of price discrimination can
the monopolist implement? Calculate in this case, firms’ profits and social welfare.
c. Answer without doing any calculation. Would the social welfare increase if the
government prohibits price discrimination?
d. Assume now that the monopolist is unable to distinguish consumers, Furthermore,
there is no arbitrage. Which type of price discrimination can the monopolist implement?
Calculate the optimal two-part tariff. Calculate the profits of the monopolist.

6) A monopolist faces two types of consumers. There are 100 identical consumers of
each type. There are no production costs. Demand functions are given by
and
a. Assume that the monopolist has no information about the type of each consumer but
knows the distribution of tastes and wants to implement a second degree price
discrimination imposing a two-part tariff like T(q)=A+pq. Obtain the values for A and p
under the optimal two-part tariff scheme if the monopolist wants to sell the product to
both types of consumers. Calculate consumers’ surplus.
b. Assume now that the monopolist distinguishes the type of the consumer she is selling
to. Furthermore, no arbitrage is possible. The monopolist wants to discriminate prices
with a tariff for the consumers of type i=1,2. Obtain the values for
and . Is the social welfare maximized?
c. Assume that the situation is the same as in b. but now perfect arbitrage within the
consumers of the same group is possible. Obtain thus the quantity and the price under a
third degree price discrimination scheme. Compare the total surplus with the a. and b.
cases.

7) In a market there are two types of consumers, i=1,2. The willingness to pay of a
consumer of type i is given i=1,2 where . The proportion of
consumers of type 1 and 2 is respectively 1/ 4 and ¾ being .
a. Calculate the optimal two-part tariff and its firms’ profits.
b. Compare the marginal prices in the latter case with the prices under perfect
discrimination and under uniform pricing (consider only the case where both types of
consumers consume).

8) A tour operator is considering the possibility to launch a specialized brochure for

each type of consumer she has identified: couples with children (type 1) and couples
without children (type 2). All consumers of the same type will be charged with the same
price and no reselling (arbitrage) is possible. The tour operator knows the total* demand
of the consumers of type 1: and type 2: . Assume there are no
production costs. * In this case, assume the total demand like the aggregate demand weighted according to the
proportion of individuals.
a. What type of price discrimination can the tour operator implement?
b. Would the tour operator practice price discrimination or would set just a unique
price?
c. Without any calculations, does this type of price discrimination increases or
diminishes social welfare with respect to the situation with a unique price?

9. An entrepreneur is considering the possibility to establish an entrance fee to her

costumers to enjoy gym facilities to afterwards paying a price to rent the courts. The
marginal cost is equal to 2. The entrepreneur is not able to distinguish between
consumers but has deduced their demand functions. Assume there are two types, a and b
with demands given respectively by and . The proportion of
consumers of types a and b are respectively 0.2 and 0.8.
a. If you want to have both types of consumers, which would be the optimal two-part
tariff?
b. Would the firm obtain larger profits by letting enter only consumers with higher
willingness to pay (type b)? How could the entrance of consumers of type a be deterred
(economically, of course)?
10) A monopolist has two types of consumers with aggregate demands given by
and with consumer proportions equal to 0.6 and
0.4 respectively. Marginal costs are equal to 3.
a. If we assume that the monopolist is able to recognize the type of the consumer from
her age, which price would the firm set for each segment of the market?
b. Check that the group with smaller price elasticity pays a higher price.
c. If we assume that the monopolist is unable to distinguish the type of the consumer
and wants, however, to set a two-part tariff of the type T(q)=A+pq. In which case would
she obtain higher profits, by selling to both types of consumers or by selling only to the
consumers with the largest demand?

11) A monopolist has two types of consumers with aggregate demands q1 = 80-p and
q2=30-p with proportions 0.25 and 0.75 respectively. The production cost is zero.
a. If you are unable to distinguish the type of consumer who enters the store and there is
no possibility of arbitrage, calculate the two part tariff and the profits if the monopolist
serves both types of consumers.
b. If you only sell to the group of high demand, what tariff would you charge?
c. Compare the results of the two previous sections in terms of profits and social
welfare.

12) A monopolist can sell its product to two different types of consumers. The demand
for each group is given by D1 (p) = 120-2p1 for consumers of type 1 and D2(p) = 60-p2
for consumers of type 2. Arbitrage is not possible between the two groups and all
consumers of the same group buy at the same price per unit (there are, however,
problems of arbitrage within each group). Production costs are zero.
a. Calculate the profits if the monopolist discriminates between the two types of
consumers. What kind of price discrimination do we have? Give an example of a way to
prevent resale between the two groups of consumers.
b. Calculate the profits that the monopolist would obtain if she is not interested in
discriminating between different consumers and, therefore, fixes the same price for
both. With which option does the monopolist obtain larger profits?
c. Calculate the social welfare with price discrimination and without.

13) A monopolist has a demand equal to D(p) = 20-2p and the production cost function
is C(Q) = 5Q.
a. Determine the equilibrium if the price chosen is a linear function and the monopolist
does not distinguish the type of consumer.
b. Suppose now that the monopolist can distinguish the consumer and decides to
discriminate prices through the use of two-part tariffs. What kind of tariff would it
choose to maximize profits? What type of price discrimination is this? Compare the
solutions obtained in terms of profits and welfare.
14) In a market a new product can be introduced or not. The demand function of this
new product would be D(p)=1-p. Assume that the entrance cost to start selling the good
is given by f. Obtain the range of values for f for which
a. The social planner and the monopolist introduce the new product
b. The social planner introduces the product but the monopolist does not.

15) Consider the following linear city model of horizontal differentiation for a
monopolist. Consumers are distributed across the segment of length 1. The value that
the consumers give to the good is equal to s which is high enough to make the
monopolist be willing to provide the good to all consumers. The monopolist can set so
many openings (shops) as desired in each point of the segment between 0 and 1. There
are no production costs. Transportation costs are given by t(x-e). The cost for each
opening is equal to f.
a. How many shops and where will the monopolist open?
b. And the social planner?

16) Consider the following vertical differentiation model. Each consumer buys either 0
or 1 unit of a certain good. This good has a quality given by the parameter s. A
consumer of type θ has a net utility equal to θ+(α-θ)s-p when the good of quality s is
purchased at a price p. When the good is not purchased the consumer obtains a net
utility equal to 0. The parameter θ is distributed in the interval [0, α] where α>0. We
assume that C(q,s,)=qs.
a. Obtain the production and the optimal quality for the monopolist
b. Repeat the same exercise for the social planner.