Price discrimination | Microeconomics | Khan Academy

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Narrator: Let's say that
I am a producer of wine

and in this axis, vertical axis,
this is dollars per bottle,

so 10, 20, 30, $40 per bottle.

On this axis right over here I will have

quantity of bottles I produce per week.

Let's say that this is
100, this is 200, 300

and then 400.

This is quantity of
bottles per week, per week

and this is dollars per bottle.

Let's think about the demand curve here.

The demand curve for my type of wine,

we're going to assume this
is highly differentiated

wine, the demand curve
looks something like that.

Now, I'm doing it as a
straight line for simplicity.

The demand curve looks like that.

Since I said differentiated,
this is not going to be

perfect competition.

I have a monopoly in my type of wine,

so this isn't the market
for wine generally,

this is a market for my wine.

My wine has won some taste tests,

it has this unique
flavor and whatever else,

so you can view me as a
monopolistic competitor.

There's obviously
competition from other wine

labels, from other wine producers,

but my wine is differentiated
and I have a monopoly

in my particular type of wine.

We've done this multiple times,

if I have a monopoly in my type of wine,

we're talking about the market in my wine,

then my marginal revenue curve,

my marginal revenue curve
will have twice the slope

of this, so it will look
something like that.

It will actually keep
going negative after that,

so that is my marginal revenue curve.

Then we can think about the cost side.

The cost side of things, my marginal cost

might look something like this.

Marginal cost or you
could even view that as

a supply curve for my wine.

Then we can also do average total cost.

So the average total cost start off high,

we have a fixed cost
divided by a small quantity,

but the marginal costs
are lower than the average

so the average keeps going down and down

and down and down, then they're equal.

Now each incremental unit is bring up the

average in cost, so then
the average total in cost

might look something like that.

Average total cost.

We've seen this show multiple times.

If in the near term, I
do have a monopoly here,

so I will just produce the quantity where

my marginal revenue is
equal to my marginal cost.

Before that quantity, for every unit,

I'm getting economic
profit, economic profit,

economic profit.

If I produce more than
that I'm not getting

any economic profit
anymore, so I'm going to

produce this quantity which, I don't know,

looks like about 160 units
and I'm going to sell it

... I'm going to sell it for ...

Oh, I'm going to be careful here.

The price I'm going to be able to sell it,

so this is the quantity that
I'm going to be able to sell,

the price that I'm going to sell it at,

go up to the demand curve,
that point of the demand

curve and it looks like
I'll be able to sell it

for about, I don't know, $33 a bottle.

So, $33 a bottle and if
we want to think about

economic profit, this
is the average revenue

per bottle, this is the
average cost per bottle.

So, this is the average economic profit

per bottle and I multiply
that times the total number

of bottles and I'm going
to get my economic profit.

This area right over here
is my total economic profit.

We can think about how
much are the consumers

benefiting from it and how
benefit are they getting

excess of what they're paying for it

and that would be this
area right over here.

That is the consumer surplus.

(writing) Consumer, consumer surplus.

Now, let's say I'm just
not happy with this.

I see that there's an
opportunity here to get

even more economic
profit because after all

we've been talking about
this from the beginning.

There are people here who are getting over

$40 of benefit from my
wine, but I'm selling

it to them for only $33.

Everything we've assumed so
far is that we're selling

... all the consumers are
buying something at the

exact same price, but I'm
a crafty wine producer

and I say, well, let me
call that in to question.

Why can't I just put a
different label on my exact

same wine and sell it to these people for

a different price and so
I do that exact thing.

I still produce this exact same quantity,

I produce this exact same quantity,

but the first hundred units of my quantity

I put a different label on it.

This label says 'Super Fancy Wine.'

(writing) Super Fancy
Premium, the best wine

you ever drank.

Super Fancy Premium Wine,
it has all of the awards,

all of the fancy people who like it.

I put it in the best wine boutiques

and the best restaurants, with that label,

all the exact same stuff in the bottle

and I sell that one at $40 a bottle.

So the first hundred units
I sell at $40 a bottle,

so now my economic
profit on those units ...

remember, I'm producing 150, so my average

total cost is down here.

My average total cost is
this line right over here.

So, on those bottles I'm getting this much

economic profit per bottle times

these hundred units.

I've now increased my economic profit.

I've eaten into the consumer surplus.

I've taken some of that for
myself and turned it in to

economic profit and then the other,

I don't know, this looks
like about 60 or 70 bottles,

I just have with the traditional label

and I maybe sell at the supermarket.

(writing) Traditional, traditional label

and I just sell it at the supermarket.

I call it, just, Pretty Good Wine,

just so in case someone
who bought it at the fancy

place doesn't see that
the Pretty Good Wine

is the exact same thing.

What I've just done here
is I've discriminated,

I've discriminated amongst consumers

depending on consumers willingness to pay,

I've essentially charged
them different prices

and also, to some degree,
based on where they shop

and their gullibility, I am charging them

two completely different prices.

This right over here is
called price discrimination.

It's a way that a supplier
can essentially take

some of the consumer
surplus for themselves,

eat into some of that
excess marginal benefit

that they're essentially
giving it to the consumer

and turning it into economic profit.