Economocs

BUSS1040 Essay Assignment a) The handset market within Sydney can be classified as a monopoly. Because Donna knows the exact willingness to pay for the handset she can set her price accordingly. Hence Donna should implement perfect price discrimination. By knowing the price, the seller is able to encapsulate the total market surplus, consequently diminishing all consumers’ surplus and converting it into revenues. On this notion, because the firm knows how much each consumer is willing to pay, they will maximise their revenues (See Figure 1) at the expense of setting their prices too high or too low. Moreover, setting one singular price will not differentiate consumers as well as improve profits substantially. In addition, from a social welfare perspective, first degree price discrimination is not necessarily undesirable because the market is completely competent and there is no deadweight loss to society. Figure 1- Source: http://welkerswikinomics.com/blog/2009/02/06/price-discrimination-101/ (Viewed 23/5/12)
b) Contrary to the above scenario, Donna does not know every consumer’s willingness to pay. However, the structure of the market is still a monopoly. Donna should choose to implement second-degree price discrimination. According to Taylor and Frost (2009), to discriminate between buyers “it is optimal to charge a lower price to the high-elasticity group and a higher price to the low-elasticity group,” thus enabling firms to maximise revenues. The information that Samsung needs to obtain in order to execute this pricing strategy are, according to Dixon and O’Mahony (2009), the price of the good itself, the price of substitutes and complements, expected future prices, consumer preferences and levels of income. This can be conducted through research and development in addition to quantity discounts, quality/price tradeoffs, timing of sale and cheaper prices at certain times (Wait 2012).

c) The presence of the IPhone changes Samsung’s pricing