>> Alright, welcome back.
We got one more topic to
talk about when it comes
to monopolies and that's price
discrimination by monopolists.
So one of the things that
happen in a monopoly is
that you have an option of
sending up variable pricing
if you want to and the
reason why you do that is
that you wanna maximize
the profit.
I mean that's pretty much given.
So what happens is that
monopolists have discovered
that sometimes it's better
if you start giving certain
different markets a different
pricing scheme.
Why is that?
Well imagine if you were like--
we're looking at the movies
market and usually when you look
at movies there's
not a whole lot
of different movie markets
available in any one big city.
There's maybe three or
four different large groups
of movie theaters and they
tend to run the show and one
of the things that you note is
that there's always an
old-age benefit, right?
You can go in and get
a senior discount.
Why do they give
seniors discounts?
I mean it even happens at like
McDonalds where you can go in
and get a 10 percent discount
if you're a senior, get your cup
of coffee every morning.
Why is that?
The reason why, it goes back
to chapter five and elasticity.
[Noise] Alright, younger people,
our demand for movies is a
little bit more inelastic
than older people, why?
Because we have more
money, generally speaking.
As soon as you get older
and you're not working
anymore, what are you doing?
You're living on a pension.
You're living on
your social security.
Your income is fixed.
If you have a fixed
amount of income,
how much money do you
have to spend on movies?
If movies are all, you know,
15, 12 dollars a pot for you,
are you gonna go
[inaudible] many movies?
No, so what do movie theaters
wanna do to draw you in?
They recognize that your
demand is more elastic.
You have other ways
to spend your time.
Instead of going to a
movie, you may read a book
which is why more old
people read books.
You can go to the library
and get it for free.
It's not such a bad
way to spend your time.
But what these monopolists
who are running movie
theaters have figured out is
that they can go ahead
and analyze the demand
for the two different age
groups and figure out, oh okay,
my supply [noise]
is exactly the same.
I mean the marginal cost that I
have whether I'm showing a movie
to an old person or a young
person is exactly the same.
So those look the same but
the demands are different.
So we do wanna [inaudible]
of how do you calculate what
the marginal revenue is.
Here's my marginal
revenue for young people.
Here's my marginal revenue for
older people and the amount
of people you expect to go to
a movie, here's the quantity
for young people, here's the
quantity for older people
and what's the price
that you set?
Well shoot up the demand curve,
that's the price you're
gonna set for younger people.
What are you gonna
do for older people?
Notice that the price
is gonna be cheaper.
So really when you look at
these monopolies and they look
at price discrimination
between age groups,
all they're really doing
is looking at the demand
for that particular good in each
age group and realizing that one
of them is more elastic.
This, the old people, they're
gonna have more substitutes
for your particular good so
they're gonna not buy as much.
So if you lower the price,
you can still potentially
earn a profit on them, right?
Here's the profit that they make
for each young person
who spends money.
Notice they're still making a
profit for each older person,
it's just not as much but they
still wanna maximize their
profit so they're gonna go ahead
and give you that, you know,
potential price discount
to try and draw you in
and make money off of you.
So this is why monopolies
are gonna price discriminate
and why, in theory, from
an economic perspective,
perfectly legitimate.
That covers chapter eight.
