Question

(a) Mir. David Chin is the twenty-five year old owner of a food stall in a prime location selling cupcakes. His cupcakes are of uniform quality and there is only one flavour. He has many regular customers who are very enthusiastic about the unique taste and appeal of his cupcakes compared to more traditional hawker fare usually sold at such food locations. To ensure each of the cupcakes he puts on sale are of the freshest quality, he does not sell anything that is not baked on the same day. In order to prevent leftovers, he progressively reduces the prices he charges in the last two hours of the sales each day from 8p.m. to 10p.m. From 8p.m. to 9p.m., he sells his cupcakes at a 33 per cent discount. From 9p.m. to 9.30p.m., he sells them at a 50 per cent discount. In the last half-hour, he sells them at a 67 per cent discount. Compare the economic rationale of his approach to a situation where he sells at the same price throughout the day instead of reducing prices at night. Locate the appropriate type of price discrimination he is practicing from the possible alternatives. (12 marks) Analyse the conditions which enable Mr. David Chin to do what is described in (13 marks) (b) part (a).

Answer 1

This is a type of price discrimination generally found in monopoly market. The monopol1st charges ditierent price for the same product from different consumers. Thus the practice of charging different price for the same product is called price discrimination. In the words of J.S Bains "Price discrimination refers strictly to the practice by a seller to charging difierent prices Trom ditierent buyers for the same good" The price discrimination may be personal or geographical or according to use Personal price discrimination occurs when ditrerent prices are charged Irom ditierent lndividuals. Geographical price discrimination occurs when the monopolist charges different prices at different locality for the same product. The price discrimination is on the basis of use whern the different price for the same product is charged according to the difference in use. The price discrimination can be classified in to three:- They are Price discrimination the first degree, discrimination of the second degree and price discrimination of the third degree. Price Here the monopolist is practicing price discrimination of the third degree Third degree price discrimination is charging different price to different groups of consumers for the same product. These groups are classified according to age, sex, location, time of use. Here the monopolist offer special discount to certain groups. The conditions for the third degree price discrimination are: 1. The monopolist must be able to set price 2. The monopolist must be able to divide the customers 3 There shoula not be any resale

charging 100 100 76% discount Price MC MR Quantity The equilibrium condition of the monopolist is MC-MR. In the first figure price AR, curve (D) is above marginal cost curve. In the first figure the monopolist is charging 100% price . The average revenue curve (D) lies far above the MC curve. So the monopolist is earning supernormal profit. But in the evening he is selling the product at 67% discount in the last hou rs of business. Even here also the monopolist earns profit. Because the AR curve (D) lies above the MC curve Thus even if the monopolist sell the product at 67% discount he will not suffer losses.