THE MORAl OF THE STORY

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THE MORAl OF THE STORY

Like any parable, the story of Readalot Publishing is stylized. Yet also-like any parable. it teachs some important and general lessons. In this case, there are three lessons to be teamed ‘about price discrimination.

The first and most obvious lesson is that price discrimination is a rational strategy for a profit maximizing monopolist. ill other words, by charging different prices to different customers, a ‘monopolist can increase its profit. In essence, a price-discriminating monopolist charges each customer a price closer to his or her willingness to pay than is possible with a single price.

The second lesson is that price discrimination requires the ability to separate customers ‘according to their ‘willingness to pay. In our example, customers were “separated geographically: But sometimes monopolist choose other differences, such as age or income, to distinguish among customers.

The third lesson from our parable is perhaps the most surprising: Price discrimination can raise economic welfare. Recall that a deadweight loss arises when Readalot charges a single $30 price because the 400,000 less enthusiastic readers do not end up with the book, even though they value it at more than its marginalcost of production. By contrast, when Readalot price discriminates, all readers end up with thebook, and the outcome is efficient. Thus, price discrimination can eliminat e the inefficiency inherent in monopoly pricing.

Note that in this example the increase in welfare from price discrimination shows up as higher producer surplus rather than higher consumer surplus. Consumers are no better off for having bought the book: The price they pay exactly equals the value they place on the book, so they receive no consumer surplus. The entire increase in ‘total surplus from price discrimination accrues to Readalot Publishing in the form of higher profit.

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THE MORAl OF THE STORY