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Difficulty: EasyMonopoly: Price Discrimination Conditions, Types, and Effects

A cinema operator charges adult moviegoers a higher admission fee while offering discounted ticket rates to students for the exact same movie screening. Which of the following conditions is essential for the cinema operator to successfully maintain this pricing practice?

  1. The price elasticity of demand for movie tickets must differ between the adult and student market segments.Answer
  2. B
    The price elasticity of demand must be identical and perfectly inelastic across both consumer groups.
  3. C
    Student ticket holders must be permitted to resell their discounted tickets to adult moviegoers.
  4. D
    An increase in admission price automatically shifts the overall market demand curve for cinema tickets outward.

Answer

The price elasticity of demand for movie tickets must differ between the adult and student market segments, and the monopolist must be able to prevent ticket resale between the two groups.
For a monopolist to successfully practice third-degree price discrimination, three primary conditions must be met: market power, effective separation of sub-markets (to prevent arbitrage), and differing price elasticities of demand between consumer groups. By charging a higher price to adult moviegoers (who have less elastic demand) and a lower price to students (who have more elastic demand), the cinema operator maximizes total revenue and profit.

Step-by-Step Solution

1
Identify the economic concept described in the scenario.
The cinema operator is practicing third-degree price discrimination by charging different prices to different customer groups for identical services.
Recognizing the market structure and pricing strategy sets up the necessary theoretical requirements.
2
Evaluate the key conditions required for price discrimination to be effective.
The seller must have monopoly power, sub-markets must be effectively separated to prevent arbitrage (resale), and price elasticities of demand must differ across sub-markets.
Monopolists maximize profit by charging higher prices in the market segment with less elastic (more inelastic) demand and lower prices where demand is more elastic.

Key Concept

Conditions for Monopoly Price Discrimination
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Topics

Monopoly: Price Discrimination Conditions, Types, and Effects

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