Monopoly Behavior Price discrimination first second and third degree Bundling Two part tariffs First Degree Price Discrimination Monopolist sells different units of output for different prices and prices may differ from person to person Idealized concept First Degree Price Discrimination p p MC MC yA y yB y Second Degree Price Discrimination Monopolist sells different units of output for different prices but each person that buys the same amount pays the same price E g bulk discounts public utilities Second Degree Price Discrimination p p B B MC C A yB MC yA y C A yB yA y Second Degree Price Discrimination In practice monopolist adjusts quality rather than quantity of the good Idea reduce the quality offered to the low end of its market to prevent high end customers from switching end get more of their surplus E g unrestricted airfare for business travel and restricted airfare for non business E g First class and coach class Third Degree Price Discrimination Monopolist sells different units of output for different prices but every unit of output sold to a given person sells for the same price E g senior citizens and students discounts Third Degree Price Discrimination p p pA pB MC MC yA y yB y Bundling Packages of related goods offered for sale together Software spreadsheet word processor In 1993 around 50 of Microsoft applications software was sold in bundles Magazines subscriptions Bundling Example Type of consumer Word processor Spreadsheet Type A consumer 120 100 Type B consumer 100 120 Bundling Example Marketing policy 1 sell items separately best to charge 100 each software Monopolist gets 400 Marketing policy 2 bundle word processor and spreadsheet and sell each bundle for 220 Monopolist gets 440 Bundling Intuition Individual with lowest willingness to pay determines market price when an item is sold to different people Bundling allows monopolist to reduce the dispersion in willingness to pay and thus to charge a higher price for the bundle of goods Two Part Tariff Example owners of amusement parks set one price for tickets to get into the park and another for the rides How are these prices related Two Part Tariff p p MC y number of rides