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Pricing Strategies for Firms with Market Power 10

You’ve no doubt noticed many places where you can receive price discounts if you show your student ID. Commonly discounted goods include movie admissions, clothing at the campus bookstore, gym memberships, train fare, and, sometimes, phones or even computer equipment.

It’s nice of these sellers to give you a price break while you’re getting your education. School isn’t cheap, and every bit helps. The sellers’ generosity must say something about the value that they put on everyone receiving a good education. Right?

Not really. The main motivation behind such student discounts isn’t altruism. Instead, it is usually just the sellers’ attempt to extract more producer surplus from the market. That’s not to say you’re worse off because they’ve offered these discounts; in fact, they make it more likely you will be able to consume goods that would otherwise be too expensive for you. But these discounts increase sellers’ producer surplus and improve their bottom lines.

How, exactly, does offering student discounts raise a seller’s producer surplus? From our study of market power in Chapter 9, we know that when a firm can influence its own price, it makes a higher profit than a perfectly competitive (i.e., price-taking) company. The market power pricing rule we came up with, however, required the firm to charge the same price to all customers. In this chapter, we see that if a firm can charge different prices to different groups of customers (e.g., students and nonstudents), it can raise surplus and profit above those earned by a standard monopolist charging every customer the same price. There are many ways in which firms with market power can charge different prices for the same good. This chapter explores the most common of these strategies and looks at how they affect producers and consumers in the market.