Puzzle. Car produced (Chrysler) in Windsor, Ontario sells for lower price in U.S than in
Canada. Why is that?
● 1. There must be difference in costs (import duties, paperwork, etc)? - NO
● => There are differences in elasticities of demand.
○ In Canada, import duties are higher, so fewer substitutes and lower price
elasticity of demand.
● Explanation: it nothing more than price discrimination (tool to increase profits)
Monopoly, Oligopoly, Monopolistic Competition
● All three firms faces downward-sloping demand curves
○ Perfect competition is an exception
● 1) If face a downward-sloping demand curve, have some degree of market power (ability
to raise price without losing all clients)
○ Perfectly competitive firm cannot raise price
● 2) Since they have market power, they may try to price discriminate.
Is price discrimination “bad”?
● Perfect price discrimination: Monopolist charges each consumer the maximum price the
consumer is willing to pay
○ 1. Each customer pays their “reservation price”
■ maximum price he/she is willing to pay
○ 2. Is allocatively efficient if the monopolist is able to perfectly price discriminate
● Example: Used car salesman
○ A successful used car salesman
Insight: If monopolist can perfectly price discriminate
● 1) Monopolist does not have to lower price on all previous units to sell an additional unit.
● 2) DD curve becomes the monopolist’s MR curve (since MR = P)
● 3) To maximize profits, monopolist will produce where P(=MR)= MC.
● 4) Same output as in perfect competition
● 5) Allocatively efficient ● Consumer surplus: decreases to zero
● Producer surplus: increases by: consumer surplus + deadweight loss
● Economicst article:[caveat emptor.com]
○ Price customization software: trying to achieve perfect price discrimination