Help: Question on price discrimination!

[bizi]

can anyone give me any ideas how to answer this question?

Your group has been recruited by Tenaga National Berhad (TNB) to develop strategies to discriminate prices in order to maximize profit. Discuss plans and strategies to discriminate prices in order to maximize profit.

thanks

[cfeic]

why did TNB want to use discriminate to maximixe profits?Tnb had already monopoly electricity in our country... If to maximize profit maybe its can charge more in richer residential place,because they will not cut down the usage of electric even the rates of electric had raise...haha its just my own opinion lar...just ignore if u think it is nonsense...

[Seiryu]

Is this your intermediate microecons homework?

Monopolies actually price discriminates. In fact, monopolies have higher tendencies to price discriminate because they have the power to do so (price of good is not dictated by the market's equilibrium, but by them. Well they still have a certain degree of constraints like elasticities of demand etc, but generally they have more freedom).

The only problem with monopolies setting market prices is that monopolies cannot tell the reservation price of a consumer. Setting too high of a price woos consumers away, setting too low of a price attracts consumers but pulls them further away from maximum profit. So to solve this problem, monopolies (or rather, economists) come up with a device to elicit consumer's reservation price. This device is called price discrimination. I am not too sure how TnB does it, but the usual textbook way of doing it is purposefully defecting a good and sell it at a cheap price, so that the good is attractive to consumers with lower reservation price, and the more expensive non-defected good is more attractive to consumers with higher reservation price, thus capturing both people with high reservation price and low reservation price.

So to answer your question I guess I would bullshit some methods that follows the same line of thought. C'mon you can't expect to reap off answers from the internet for your homework.

[Leen]

Even if you are the monopoly, you can still price-discriminate in order to maximize your profit. For example, if Malboro is the monopoly for cigarettes, it can still sell $50 to the chain smoker and $20 to the non-smoker and get to maximize its profits. Of course there are problems such as non-smoker buying the cigarettes and selling them to the smokers (black market problem) and other things but this example just illustrates how monopoly doesn't mean there should not be any price discrimination.


I think some of the things you can do (realistic and non-realistic) are :

1. Survey the areas with highest electricity consumption and charge them the most, while the lower electricity consumption are charged less.

The problem with that strategy is that people can move from the expensive area to the cheap area. So that is not very efficient. However, you have remember that moving is not something that people can do in a day or two time. So because of the inelasticity of housing, this strategy will still work in the short run but I do not think it is sustainable in the long run.

2. Since elasticity is very important to determine where you want to price discrminate, another strategy is to charge all non-residential buildings to be charged more than residential building.

This strategy will definitely force the non-residential buildings such as offices, shops, schools, factories, to pay more and since they HAVE TO turn on those lights, computers, and whatnot, you get the most profit out of this. This strategy seems to work in the short run and probably the long run too if everything else stays constant (including technology, amount of buildings, etc).

I'm kind of tired so I am not thinking about more.
But you know, there are definitely many strategies to make this work.

Think in terms of elasticities. Always go for something that is inelastic. This problem seems like a microeconomics problem to me.

[Seiryu]

Oh well might as well. The non-defected good can be higher voltage of electricity and the defected good can be lower voltage of electricity. So higher voltage of electricity is more attractive to people with higher purchasing power (say... factories) and lower voltage of electricity is more attractive to people with lower purchasing power (say me). So both me and factories would buy electricity... and ... lose our consumer surplus...........

[bizi]

to seiryu and leen, thnks so much.both of u gave me some ideas on how to answer the question. this is my asgnment for my business economics subject.. i was thinking all night how to answer this question.

leen, can u xplain more about elasticities and the realation with price discrimination. im kinda blurrrr... pls...help me ^^

[Leen]

price elasticity
From wiki:
In economics, elasticity is the ratio of the percent change in one variable to the percent change in another variable. It is a tool for measuring the responsiveness of a function to changes in parameters in a relative way.


Example:
Something that is extremely inelastic include cancer pills (assuming they exist). If a pharmaceutical company charges $10 for the pills, a cancer patient will buy it at $10. If the company now charges at $100, the patient STILL has to buy it because there's almost NO substitute for this item and health comes first. Even if the price goes to $1000, he might still buy it until at one point, say the company charges $10,000 and the patient really really has no money. Then the only choice left is to die. In this case, we say that the pill is extremely inelastic (or some might even call it perfect inelasticity).

Something that is elastic is mostly in the perfect competition market.
For example, Company A sells milk at $2 and Company B sells milk at $2 too. One day A decides to raise the price to $2.50. Immediately, people who are not brand loyal/poor will switch from buying A to buying B. So in such case, we say the demand elasticity for milk is very high.

That's just the basics of elasticity without going into the mathematics part, which I don't think will be useful for your class too.

@Seiryu
Price discrimination is an effort to capture all the consumer surplus so it does make sense that we lose our consumer surplus. XD The company turns all that into producer surplus (evil people). XD

[Seiryu]

Yea I agree. I think elasticity has little to do with this homework. Elasticities of demand in a monopolistic model merely determines monopolist's power over the market, and has little to do with price discrimination.

[Leen]

Originally Posted by Seiryu

Yea I agree. I think elasticity has little to do with this homework. Elasticities of demand in a monopolistic model merely determines monopolist's power over the market, and has little to do with price discrimination.

Elasticity of demand does matter when it comes to price discrimination. You would like to raise price more for people with inelasticity demand than people with very elastic demand. Like in the example of charging computer companies with VERY high price of electricity and just high price for houses. Computer companies have to use electricity and cannot reduce it a lot, while houses can easily just reduce electricity by watching less television, do laundry every 2 weeks instead of 1, etc .....

To make the most profit out of the price discrimination, I think it is still better to consider the elasticity of demand, rather than ignoring it.


To give you another example, just think of some budget airline business. It is a monopolistic business and they do price discrimination as well. But they also pay a lot of attention to elasticity of demand.

If you book 100 days earlier,you get a cheaper ticket than someone who books the ticket 1 day before the flight.

[Seiryu]

Oh okay. That works.