248 CHAPTER 8 PROFIT MAXIMISING UNDER IMPERFECT COMPETITION

8.4 PRICE DISCRIMINATION

Up until this point in the chapter, we have assumed that a circumstances, they may be able to charge consumers dif-
firm sells each unit of its output for the same price. This is ferent prices for the same product that are related to their
called uniform pricing and may result in the firm foregoing an WTP. This is called personalised or person-specific pricing and
opportunity to make greater profits. Why? Because some cus- is a strategy that can approach one of first-degree price dis-
tomers value a product more highly and thus have a greater crimination. The potential for personalised pricing in digital
willingness to pay. They would still purchase the good if the markets is discussed in Box 8.7.
price were higher. Second-degree price discrimination is where a firm offers
To exploit this situation, the firm might increase prices consumers a range of different pricing options for the same
in an attempt to capture some of this consumer surplus and or similar product. Consumers are then free to choose which-
convert it into profit. However, it faces a trade-off. A higher ever option they wish but the lower prices are conditional on
price will increase the profit per transaction, but some cus- factors such as:
tomers will no longer buy the product: i.e. the ones who
■ The quantity of the product purchased. In order to obtain
do not value it so highly. It is possible for the firm to avoid
the good at a lower price the customer has to purchase a
this trade-off by charging a higher price to those customers
certain minimum quantity of the good or service.
with a higher valuation for the product, and a lower price
■ The use of coupons/vouchers. To be eligible to purchase
to those consumers with a lower valuation for the product.
the product for a lower price, customers have to produce
Businesses can do this by implementing a strategy of price
a voucher or coupon that they have collected: e.g. from
discrimination.
a flyer inside a local newspaper or from the Internet. For
Care needs to be taken when explaining the precise mean-
this approach to work, consumers must have to exert
ing of this concept, as vague definitions can sometimes lead
some time and effort in collecting the vouchers/cou-
to it being incorrectly applied.
pons. In this way, only the more price-sensitive customers
If the cost to the firm of supplying different customers
should find it worth their while.
does not vary, then price discrimination is defined as the
■ When the product is purchased. For example, some goods
practice of selling the same or similar products to different
are priced at a higher level when they are first released
customers for different prices.
onto the market. Rail fares are higher at peak times than
If the cost of supplying different customers does vary,
at off-peak times.
then the definition is slightly more complicated. It is defined
■ The version of the product purchased. Firms can produce
as the practice of selling the same or a similar product at
different versions of the same core product that have
different prices and the difference in price cannot be fully
different levels of actual or perceived quality: e.g. value
accounted for by any difference in the cost of supply. If any
ranges of own-label products sold in supermarkets. This
difference in the cost of supplying each customer can fully
is called ‘versioning’. One example of versioning is the
explain the variation in prices, then it is not an example of
‘damaged goods strategy’, where a firm creates a lower-
price discrimination.
quality version of its good by deliberately damaging the
product. It does this by removing some features or reduc-
If customers were all charged the same price for a product
could this ever be classed as an example of price discrimina- ing its performance characteristics. Note that versioning
tion? Explain your answer. is not pure price discrimination because the product is
slightly different.
Economists traditionally distinguish between three dif-
ferent types of price discrimination.
First-degree price discrimination is also referred to as ‘per-
Definitions
fect price discrimination’. It is where the seller charges each Price discrimination Where a firm sells the same prod-
consumer the maximum price they are willing to pay (WTP) uct at different prices.
for each unit of the good. In other words, each consumer First-degree price discrimination Where the seller of
pays a different price based on their own personal valuation the product charges each consumer the maximum price
of the product. they are prepared to pay for each unit.
In reality, only the buyer truly knows their WTP for Second-degree price discrimination Where a firm
each unit of the product. The difficulties involved for the offers consumers a range of different pricing options for
the same or similar product. Consumers are then free
firm in overcoming this asymmetric information mean
to choose whichever option they wish, but the price is
that first-degree price discrimination is more of a theoreti- often dependent on some factor such as the quantity
cal benchmark than a viable business strategy. Firms may purchased.
not be able to set prices precisely equal to WTP, but in some

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 8.4 PRICE DISCRIMINATION 249

Third-degree price discrimination is where a firm divides

Table 8.3 Examples of third-degree price consumers into different groups based on some characteris-
discrimination tic that is (a) relatively easy to observe; (b) informative about
Characteristic Example consumers’ willingness to pay; (c) legal; and (d) acceptable
to the consumer. The firm then charges a different price to
Age 16–25 or senior rail card; half-price
children’s tickets in the cinema. consumers in different groups, but the same price to all con-
Nationality In several countries, foreign visitors are sumers in the same group. Some examples include charg-
charged higher entrance fees than locals ing different prices based on age, occupation, geographical
to various tourist sites. location and past buying behaviour. See Table 8.3 for some
Location Pharmaceutical companies often charge
specific examples.
different prices for the same medicine/
drug in different countries. Consumers
in the USA are often charged more than
those from other countries.
Occupation Apple, Microsoft and Orange™ provide
price discounts to employees of Definition
educational institutions.
Business or Publishers of academic journals charge Third-degree price discrimination Where a firm
individual much lower subscription rates to divides consumers into different groups based on some
individuals than university libraries. characteristic that is relatively easy to observe and
Past buying Firms often charge new customers a informative about how much consumers are willing to
behaviour lower price than existing customers pay. The firm then charges a different price to consumers
for the same product or service as an in different groups, but the same price to all the consum-
‘introductory offer’. ers within a group.

CASE STUDIES AND

BOX 8.6 WHAT’S THE TRAIN FARE TO LONDON? APPLICATIONS

Price discrimination on the trains

Ask the question ‘What’s the fare to London?’ at ticket 1. Look at each of the above questions. In each case,
enquiries, and you may receive any of the following replies: decide whether price discrimination is being practised.
If it is, is it sensible for train operators to practise it?
■ Do you want 1st or standard class? How are the train operators able to identify travellers
■ Do you want single or return? with different price elasticities of demand?
■ How old are you? 2. Are these various forms of price discrimination in the
■ Do you have a railcard (Family & Friends, 16–25, Disabled traveller’s interest?
Person, Senior, Two Together)?
■ Will you be travelling on a weekday? Choose a journey on the National Rail website at
■ Will you be travelling out before 9:30am? www.nationalrail.co.uk. Compare the different prices
■ Will you be leaving London between 4pm and 6:30pm? available at different times of the day and different peri-
■ Are you able to book your ticket in advance? ods and for different types of traveller with various rail-
■ Do you need to be flexible about the time and date of your cards and without any card. How might the different prices
journeys, or are you willing to pre-commit to a specific be justified?
train?

Conditions necessary for price discrimination its price. Thus, price discrimination will be impossible in a
to operate perfectly competitive market where firms are price takers.
■ Re-sale of the product between consumers must be diffi-
Given that firms can generate greater revenue and profits cult/impossible. A potentially profitable strategy of price
by using a strategy of price discrimination, why don’t they discrimination will fail if consumers in the low-price mar-
all implement the policy? Unfortunately for some firms, it ket are able to resell the good to those consumers who are
might not be possible for a number of reasons. The follow- in the high-price market.
ing are the conditions necessary for price discrimination to ■ Demand elasticity must vary between consumers at any KI 9
work successfully: given price. The firm will charge the higher price in the p64
■ The firm must have some market power. In other words, it market where demand is less elastic, and thus less sensi-
must face a downward sloping demand curve and hence set tive to a price rise.

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 250 CHAPTER 8 PROFIT MAXIMISING UNDER IMPERFECT COMPETITION

EXPLORING
BOX 8.7 PERSONALISED PRICING IN DIGITAL MARKETS ECONOMICS

Is it widespread and do customers think it is fair?

It is impossible for firms to gather enough information Internet protocol (IP) addresses and/or cookies. This allows
to implement a policy of perfect price discrimination: i.e. firms to capture data on the following characteristics of a user
charging each customer the maximum price they are willing and their smart device:
to pay (WTP). However, some businesses may still be able
■ geographical location (high- vs low-income area)
to charge each person a different price based on certain
■ Internet service provider (e.g. BT vs TalkTalk)
characteristics and behaviours that are relatively easy to
■ type and speed of Internet connection (mobile vs fixed,
observe. This is called personalised pricing.
copper vs fibre)
Personalised pricing is sometimes confused with price ■ browser (e.g. Chrome vs Firefox)
steering. This is where the ordering of online search results ■ type of device (laptop vs tablet vs mobile phone)
differs between consumers. For example in 2012, the travel ■ make of device (e.g. Apple vs Huawei)
website Orbitz was showing Mac users more expensive hotels ■ battery level of the device (high vs low).
than people browsing with a Windows PC. However, the
business stated that it never presented different users with All of this information helps sellers to build detailed
the same hotel room for different prices. profiles of their customers and provides useful indicators of
Personalised pricing is also not the same as dynamic their different WTP. Importantly, it is possible without the
pricing. This is where prices adjust in response to changing need for any time-consuming negotiation by a salesperson.
demand and supply conditions. These adjustments can
happen on a weekly, daily or even hourly basis. For example, Tracking browsing behaviour. Some businesses also specialise
research has found that some third-party sellers on Amazon in collecting data by tracking the browsing behaviour of
alter prices over 100 times per day in response to changing people across a number of different websites. This can
market conditions. give them:

The difficulties of implementing personalised ■ details of different purchases from different online stores;
■ the number of other websites visited (i.e. how much a
pricing in traditional retailing customer searches and shops around before making a
Personalised pricing is a difficult strategy to implement in purchase);
traditional bricks and mortar retailing. The clothes people ■ the type of website visited (discount vs luxury stores);
wear, the cars they drive, the houses they live in and ■ ‘likes’ on social media.
their ethnicity/nationality might enable an experienced
salesperson to make an informed guess about their likely Businesses process this information and sell it to other
income. This information can prove very useful if they haggle firms as it helps to tailor advertising and perhaps pricing in a
with buyers in an attempt to push prices closer to their WTP. more personalised manner.
However, there are limits to the information on both the The use of sophisticated pricing algorithms also makes
characteristics and behaviour of consumers that sellers can it easier to set thousands of personalised prices for the
collect in this manner. Negotiation is a time-consuming process, same product. It enables sellers to communicate prices to
especially for firms selling large volumes of goods. Just imagine consumers on an individual basis, making it less likely that
how long it would take to shop at a supermarket if every customer those with a higher WTP will find out that the seller offers the
had to haggle with a member of staff over each item in their same good to other consumers for a lower price.
trolley! There is also the problem of designing compensation Although digital markets enable sellers to collect more
contracts that provide sales staff with appropriate incentives information about the characteristics and behaviour of their
to negotiate in the interests of their employer. The extra customers, any estimates of WTP will never be perfectly
administrative costs of dealing with thousands of personalised accurate. They will always be approximations, as firms cannot
prices for the same product may also be considerable. read people’s minds. The fear of overestimating WTP and
For all of these reasons, the incremental costs of so potentially losing sales will tend to make firms cautious.
personalised pricing in traditional bricks and mortar retailing They are likely to include some margin for error. For example,
often outweigh the benefits to the firm. In many cases, they could charge each customer a certain percentage of their
the firm’s best strategy is to post the same price for all estimated WTP (e.g. 80 per cent).
consumers, who either accept or reject the purchase.
Evidence of personalised pricing
The impact of digital markets To what extent are firms in the UK currently personalising
The recent growth of digital markets has opened up new their prices? Recent research carried out for Citizens Advice1
possibilities for personalised pricing. It gives organisations found little evidence of it happening in essential markets such
the opportunity to collect and process detailed data about as water, energy and telecoms. The Competition and Markets
both the characteristics and online behaviour of consumers in Authority (CMA) carried out a small experiment where multiple
a cost-effective manner. This is ‘digital big data’. users looked at three products on the websites of ten leading
online suppliers – Opodo, Booking.com, Expedia, Ryanair,
Capturing customers’ characteristics. For example, the Amazon, Asda, Tesco, Apple, Zara and Staples.2 The different
browsing behaviour of buyers enables sellers to access users accessed the webpages at exactly the same time to

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 8.4 PRICE DISCRIMINATION 251

control for dynamic pricing. However, the browsing behaviour on social media. Concerns about the potential damage to a
varied by (a) the operating system – Windows vs MacOS (b) how business’s reputation and fears of a consumer boycott may
they arrived at the website – general search vs a comparison deter managers from implementing the policy in the first place.
website and (c) logging into the site vs general search. Another potential constraint is legislation. For example,
The research found very little evidence of personalised the EU’s General Data Protection Regulation (GDPR) stipulates
pricing but did find evidence of price steering. For example, that businesses must get explicit, informed and unambiguous
when searching for hotels on Opodo, users who logged into consent from the consumer for the use of their data. Recent
the site were listed more expensive rooms than those who research4 found that only 11.8 per cent of the consent pop-ups
accessed the website via a general search. that appear on websites met the minimum requirements of GDPR.

Constraints on the use of personalised pricing 1. Draw a diagram to illustrate a firm with market power
Why are firms so reluctant to implement a strategy that could implementing a strategy of personalised pricing. Assume
be so profitable? One potential constraint is the attitude and the firm sets prices equal to 80 per cent of the estimated
perceptions of the public. Research carried out by Citizens WTP of its consumers.
Advice found that 84 per cent of people were uncomfortable 2. To what extent is personalised pricing in the interests of
about the use of personalised pricing in markets for essential consumers?
services and 75 per cent would not trust a seller who used this
pricing strategy. In focus groups carried out for Ofcom, the Read the August 2018 Citizens Advice Report (see
majority of participants thought the practice was unfair.3 below). Summarise the findings and assess whether
the practice of personalised pricing has any benefits
Given this evidence on its unpopularity, firms who use
for the consumer.
personalised pricing are likely to receive negative comments

1 Morgan Wild and Marini Thorne, A price of one’s own: An investigation into personalised pricing in essential markets, Citizens Advice (August 2018),
www.citizensadvice.org.uk/a-price-of-ones-own-an-investigation-into-personalised-pricing-in-essential-markets/
2 ‘Pricing algorithms: economic working paper on the use of algorithms to facilitate collusion and personalised pricing’ CMA Working Papers, No.94
(8 October 2018),
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/746353/Algorithms_econ_report.pdf
3 Personalised pricing for communications: Making data work for consumers, Ofcom (4 August 2020),
www.ofcom.org.uk/phones-telecoms-and-internet/information-for-industry/personalised-pricing-for-communications
4 Midas Nouwens et al., ‘Dark patterns after the GDPR: scraping consent pop-ups and demonstrating their influence’, in CHI ’20: Proceedings of the 2020 CHI
Conference on Human Factors in Computing Systems. Association for Computing Machinery (25–30 April 2020),
https://arxiv.org/pdf/2001.02479.pdf

Definition Figure 8.12 Third-degree price discrimination

Personalised pricing Where firms use information P

obtained on consumers (e.g. from browsing or purchas-
ing history) to enable them to charge people a price spe-
cific to them and as close as possible to their willingness
to pay (WTP). P2
P1

D
Advantages to the firm
Price discrimination allows the firm to earn a higher revenue
from any given level of sales. Let us examine the case of third-
degree price discrimination. O 150 200 Q
Figure 8.12 represents a firm’s demand curve. If it is to
sell 200 units without price discrimination, it must charge a
price of P1. The total revenue it earns is shown by the green
area. If, however, it can practise third-degree price discrimi-
Another advantage to the firm of price discrimination is
nation by selling 150 of those 200 units at the higher price
that it may be able to use it to drive competitors out of busi-
of P2, it will gain the pink area in addition to the green area
ness. If a firm has a monopoly in one market (e.g. the home
in Figure 8.12.
market), it may be able to charge a high price due to relatively
inelastic demand, and thus make high profits. If it is under
Explain why, if the firm can practise first-degree price
oligopoly in another market (e.g. the export market), it may
discrimination by selling every unit at the maximum price
each consumer is prepared to pay, its revenue from sell- use the high profits in the first market to subsidise a very low
ing 200 units will be the green area plus the pink area in price in the oligopolistic market, thus forcing its competitors
Figure 8.13. out of business.

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 252 CHAPTER 8 PROFIT MAXIMISING UNDER IMPERFECT COMPETITION

Profit-maximising prices and output

Figure 8.13 First-degree price discrimination
Assuming that the firm wishes to maximise profits, what dis-
criminatory prices should it charge and how much should
P
it produce? Let us first consider the case of first-degree price
discrimination.

First-degree price discrimination

P1
Since an increase in sales does not involve lowering the price
D for any unit save the extra one sold, the extra revenue gained
from the last unit (MR) will be its price. Thus profit is maxim-
ised at Q 1 in Figure 8.14, where MC = MR (= P of the last unit).

O 200 Q Third-degree price discrimination

Assume that a firm sells a given product (such as window
cleaning services) and can split its customers into two
groups, based on location, where people in market H have a
higher average income than people in market L. This is illus-
trated in Figure 8.15.
Figure 8.14 Profit-maximising output under first-
It is highly probable that most consumers with the higher
degree price discrimination
incomes would be willing to pay more for the product than
those on low incomes. Panel (a) in Figure 8.15 illustrates the
P
MC demand curve for the firm’s product in the high-income
market, market H, while panel (b) illustrates the demand
curve for those in the low-income market, market L.

Equilibrium for a single-price firm. If the firm were unable to split

its customers into these two groups, then a market demand
curve could be derived. This is illustrated in panel (c) and is
obtained by horizontally aggregating the demand curves in
D = MR
panel (a) and (b). The market demand curve between points
g and h is the same as the demand curve in market H between
points a and b. This is because no consumer in market L is will-
O Q1 Q
ing to pay a price above d. As the price falls below d, consumers

Figure 8.15 Profit-maximising output under third-degree price discrimination

£ a £ £
g

d h
PH b
i
P*
e k DM
PL
j
c f DL l MC

DH MRL MRM

O QH Q O QL Q O Q* Q
MRH
(a) Market H (b) Market L (c) Total market
(markets H + L)

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 8.4 PRICE DISCRIMINATION 253

in both market H and market L are willing to buy the good, Price discrimination and the public interest
so horizontal aggregation of both demand curves must take
place from this point onwards. This creates a kink in the mar- The word ‘discrimination’ carries with it negative connota-
ket demand curve at point h. This kink also creates a disconti- tions, so people often assume that the pricing strategy must
nuity in the MR curve between points j and k. To simplify the not be in the public interest. It is also tempting to think that
explanation it is also assumed that the firm’s marginal cost is anything that increases firms’ profits must be at the expense
constant and it has no fixed costs. Thus AC = MC. of consumers’ welfare. However, this is not necessarily the
To understand how a firm would behave if it could only case and no clear-cut decision can be made over the social
set one price for all of its customers, we need to focus on desirability of price discrimination. Some people benefit TC 3
the market demand curve in panel (c). If it were a profit- from it; others lose. This can be illustrated by considering p26
maximising firm then it would produce where the market the effects of price discrimination on the following aspects
MR (i.e. MRM) = MC. This occurs at point l in panel (c) of of the market.
TC 8
p109 Figure 8.15. It would therefore produce an output of Q* and
sell all of this output at the same price of P*. Distribution effects on those customers who previously
Equilibrium under third-degree price discrimination. What hap-
purchased the good at a uniform price
Those paying the higher price will probably feel that price
pens if the firm could now charge a different price to the
discrimination is unfair to them. Price has risen for them and KI 4
customers in market H from those in market L? At the single
their consumer surplus is lower. On the other hand, those p13
price of P* the price elasticity of demand in market H is lower
who previously purchased the good but are now paying a
than it is in market L. (Note that demand is nevertheless elas-
lower price will feel better off. Their consumer surplus will be
tic in both markets at this price as MR is positive.) Therefore
higher. Judgements could be made about whether the gains
the firm could increase its profits by charging a price above
were more socially desirable than the losses.
P* in market H and below P* in market L. Once again this can
be illustrated in Figure 8.15.
In market H the profit-maximising firm should produce The impact of any extra sales
where MRH = MC at point c. Therefore it should sell an out- In Figure 8.15, the quantity of sales under price discrimina-
put of Q H for a price of PH. tion remained the same as under uniform pricing. However,
In market L the profit-maximising firm should produce in some circumstances the quantity of sales may increase.
where MRL = MC at point f. Therefore it should sell an out- There may be some consumers, such as pensioners, who
put of Q L for a price of PL. previously could not afford to buy the good when the firm
Note that PL is below P*, while PH is above P*. Also, because used uniform pricing. The lower price, made possible by
the demand curves are linear, the total output sold is the price discrimination, now enables them to purchase the
same under third-degree price discrimination as it is under good. These extra sales will have a positive impact on the
uniform pricing: i.e. Q* = Q H + Q L. We will see later in the welfare of society. They will increase both consumer surplus
chapter that this is a key point when considering whether or and profit.
not price discrimination is in the public interest.

Misallocation effects
How easy do you think it would be for a firm to split custom-
Price discrimination may cause a negative allocation effect.
ers into different groups based on their incomes?
Under uniform pricing the product is allocated through the
price mechanism to those consumers who value it the most,
given their incomes. The implementation of third-degree
*LOOKING AT THE MATHS
price discrimination could result in some units of the prod-
We can use calculus to work out the profit-maximising prices uct being reallocated away from those consumers with a
and outputs in each of the two markets H and L in Figure 8.15. higher willingness to pay to those with a lower willingness
If we know the demand functions in each of the two markets, to pay.
H and L, we can derive the total revenue functions in each
Without any restrictions, mutually beneficial trade might
market (TRH and TRL) and hence in the two markets together
(TR = TRH + TRL). Total profit is given by be able to take place between the buyers. Those consumers
with a higher valuation of the good could, under some cir-
T ∏ = TRH + TRL - TC
TΠ
cumstances, purchase it from those with a lower valuation
To find the maximum-profit output in each market, we at a price that would improve the welfare of both parties.
(partially) differentiate the total profit equation with respect to
However, the seller blocks this resale from taking place and
output in each of H and L and set each equal to zero and solve
for QH and QL (see pages A:10–12 for how calculus is used to find in the process reduces society’s welfare.
a maximum value). We can then substitute these values of QH
and QL in the respective demand functions to work out PH and PL.
Maths Case 8.3 in MyEconLab and on the student website Competition
shows how this is done by using a worked example. As explained above, a firm may use price discrimination
to drive competitors out of business. This is known as

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 254 CHAPTER 8 PROFIT MAXIMISING UNDER IMPERFECT COMPETITION

predatory pricing. For example, in many towns, large bus to raise prices above those that the competitors had been
companies have used profits they make in other towns charging. On the other hand, a firm might use the profits
where they have a monopoly to subsidise their bus fares from its high-priced market to break into another market
and thereby drive competitors out of business, only then and withstand a possible price war. Competition is thereby
increased.

Definition
Profits
Predatory pricing Where a firm temporarily charges a Price discrimination raises a firm’s profits. This could be
price below its short-run profit-maximising price in order
seen as an undesirable redistribution of income in society,
to drive one or more competitors out of the market. This
would normally involve setting a price below the average
especially if the average price of the product is raised. On the
variable cost of a competitor. other hand, the higher profits may be reinvested and lead to
innovation or lower costs in the future.

CASE STUDIES AND

BOX 8.8 JUST THE TICKET? APPLICATIONS

Price discrimination in the cinema

One of the commonest forms of price discrimination is where (a) Number of tickets (afternoon)
children are charged a lower price than adults, whether on
£
public transport or for public entertainment. Take the case
24.00
of cinema tickets. In most cinemas, children pay less than
adults during the day. In the evening, however, many cinemas
charge both adults and children the same price. 20.00
D (adults)
But why do cinemas charge children less during the day?
After all, the child is seeing the same film as the adult and 16.00
occupying a whole seat. In other words, there is no difference
in the ‘product’ that they are ‘consuming’. And why are
children charged the higher price in the evenings, given that 12.00
Child revenue-
the seat and the film are the same as during the day? maximising price
The answer has to do with revenue maximisation and the 8.00
price elasticity of demand. Once a cinema has decided to
show a film, the marginal costs of an additional customer are 4.00
zero. There are no additional staffing, film-hire, electricity or
D (children)
other costs. With marginal costs equal to zero, profits will be
maximised where marginal revenue is also equal to zero: in 0.00
other words, where total revenue is maximised. 0 100 200 300 400 500 600
Tickets
Take the case of a cinema with 500 seats. This is illustrated
MR (children)
in the diagrams, which show the demand and marginal
revenue curves for both adults and children. It is assumed
that the elasticity of demand for children’s tickets is greater (b) Number of tickets (evening and total)
than that for adults’ tickets. Diagram (a) shows demand £
during the late afternoon (i.e. after school). Here the demand 24.00
by children is relatively high compared with adults, but the
overall demand is low. Diagram (b) shows demand during Adult revenue-
20.00 maximising price
the evening. Here there is a higher overall level of demand,
especially by adults, many of whom work during the day. D (adults:
For the afternoon screening (diagram (a)), revenue is 16.00 total)
maximised from children by charging them a price of £8.00:
i.e. at the point on the demand curve where MR = 0. At this
12.00
price, 200 child tickets will be sold.
Assuming that the same adult price is charged in both D (adults:
the afternoon and the evening, we need to look at the total 8.00
evening)
demand for full-priced tickets (i.e. for both afternoon and
evening screenings) in order to ascertain the revenue- 4.00 MR (adults: total)
maximising price. This will be a price of £14.00, where total
adult MR = 0 (see diagram (b)). This will lead to 100 adult
0.00
tickets being sold in the afternoon and 500 in the evening. 0 100 200 300 400 500 600 700
But why are reduced-price tickets not available for Tickets
children in the evening? In diagram (b), the sale of low-priced

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