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VOUCHERS AND WHY FIRMS WOULD BOTHER ISSUING THEM

Price discrimination is the practice of charging a different price to different consumers


for an identical product. Companies like to price discriminate because if they
successfully manage to separate consumers and charge each of them a different price,
it would result to an increase in profit. It would also give them access to a wider target
market.

One form of price discrimination is couponing. Firms increase the price of a good and
customers who arent price sensitive would be willing to pay a higher price. On the other
hand, customers who are price sensitive can redeem a discount by using coupons or
vouchers. Other forms of price discrimination include: age discounts, occupational
discounts, retail incentives and gender based prices.

The application of monopoly graphs can be used to evaluate the economic result of the
issuance of discount vouchers and whether or not they are good for firms.

A graph is constructed in order to examine a firm before it issues discount vouchers.


Quantity of product is plotted on the horizontal axis while price of product is plotted on
the vertical axis. If a firm only charges one price to all of its customers, then
neglecting nonfinancial reasons the firm attempts to establish the price in order to
maximize profits. However, this approach of simply setting one price to all customers
will seemingly give up a lot of possible give-and-take situations. Even though the
business would generate a higher profit per good, its sales would still decline such that
its total profit would decrease. (Graph 1)

The use of vouchers is an efficient technique to price discriminate when customers are
separable according to their willingness to pay and elasticity for a product or service.
Consumers with low willingness to pay or a very elastic demand are expected to take

time to find vouchers that adequately lower the price of a good or a service. Others with
higher willingness to pay or a less elastic demand would most likely face the posted
price.

Consumers in group A, with the more elastic demand, use a voucher. They
fundamentally pay the price P - V, where V represents the vouchers value. Consumers
in group B pay the goods full price, assuming that they have the less elastic demand.
Two separate graphs are demonstrated for groups A and B because they are
considered different markets with different elasticities and WTP. The demand curve and
marginal revenue curve of group A is relatively flat because they have an elastic
demand and a low WTP. Meanwhile, the demand curve and marginal revenue curve of
group B is relatively sleep because they have an inelastic demand and a high WTP.
(Graph 2 & Graph 3)

Because the good sold is the same, the marginal cost across these two market
segments also remain the same. However, the marginal revenue curve of the two
market segments combined (MRA + MRB) is different. Only the consumers in group B
are willing to pay the higher price. The consumers in group A are willing to enter the
market if the price is lower. As a result, MRA + MRB is kinked outwards. (Graph 4)

In order to determine the equilibrium Q and P that the two markets will produce, we
need to consider our profit-maximising level which is MC=MR. As shown in the graph,
we extended it to the two markets because MC is the same in both markets. (Graph 5)

If we look at our separate market segments and we assume our profit maximizing level,
higher prices are charged for both markets. (Graph 6)

In this kind of market, we can assume that marginal costs are equal to average costs.
So, any price above the marginal cost level is equal to economic profit. Firms should
make sure they they dont give discounts below their marginal cost. In the graph, we
can observe that the price of group A is lower than the price of group B. (Graph 7)

By adding the total profit earned from group A and group B, we conclude that firms who
are able to successfully price discriminate using discount vouchers will make greater
levels of profit than a single priced firm.

References:
Riley, G. (n.d.). Monopoly - Price Discrimination. Retrieved from
http://www.tutor2u.net/economics/reference/monopoly-price-discrimination