AP_Krugman_Textbook

■ Two-part tariffs.In a discount club like Costco or Sam’s Club (which are not

monopolists but monopolistic competitors), you pay an annual fee (the first

part of the tariff) in addition to the price of the item(s) you purchase (the sec-

ond part of the tariff). So the full price of the first item you buy is in effect

much higher than that of subsequent items, making the two-part tariff behave

like a volume discount.

Our discussion also helps explain why government policies on monopoly typ-

ically focus on preventing deadweight loss, not preventing price discrimination—

unless it causes serious issues of equity. Compared to a single-price monopolist,

price discrimination—even when it is not perfect—can increase the efficiency of

the market. When a single, medium-level price is replaced by a high price and a low

price, some consumers who were formerly priced out of the market will be able to

purchase the good. The price discrimination increases efficiency because more

628 section 11 Market Structures: Perfect Competition and Monopoly

Quantity

Price,

cost

(a) Price Discrimination with Two Different Prices (b) Price Discrimination with Three Different Prices

Phigh

MC = ATC

MC = ATC

MC = ATC

D

Plow

Sales to

consumers

with a high

willingness

to pay

Sales to

consumers

with a high

willingness

to pay

Sales to

consumers

with a low

willingness

to pay

Quantity

Price,

cost

Phigh

D

Plow

Sales to

consumers

with a

medium

willingness

to pay

Sales to

consumers

with a low

willingness

to pay

Pmedium

Quantity

Price,

cost

D

Profit with perfect

price discrimination

(c) Perfect Price Discrimination

Profit with

two prices

Profit with

three prices

figure 63.2 Price Discrimination

Panel (a) shows a monopolist that charges two different

prices; its profit is shown by the shaded area. Panel (b) shows

a monopolist that charges three different prices; its profit, too,

is shown by the shaded area. It is able to capture more of the

consumer surplus and to increase its profit. That is, by in-

creasing the number of different prices charged, the monopo-

list captures more of the consumer surplus and makes a

larger profit. Panel (c) shows the case of perfect price discrim-

ination, where a monopolist charges each consumer his or her

willingness to pay; the monopolist’s profit is given by the

shaded triangle.

Alamy