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Games Inc (GI) should implement a 1st degree price discrimination strategy
because these conditions are met:
GI possesses market power and knows the customers willingness to pay
(WTP), which is derived from the individual customers price elasticity of
demand. GI will charge the maximum price customers are WTP (MB=MC),
provided it is greater than its marginal cost or the cost of attaining
customer information.
The monopolist extracts the entire consumer surplus (difference between
the consumers willingness to pay and the price paid), leading to zero dead
weight loss and a socially optimum level of quantity produced, as
observed in Figure 1 (Mankiw 2009).
GI is able to separate consumers, e.g. the markets of Australia and the US,
preventing arbitrage.

Figure 1 Mankiw 2009

No PD 1st Degree PD

GI should implement a 3rd degree price discrimination strategy because these

conditions are met:
GI possesses market power and separates consumers into identifiable
markets by country with different price elasticitys of demand, however it
must charge a linear price within each market, due to the potential for
arbitrage, due to the constant valuations within each market (Guillen
2014).
In the absence of a linear price within each market, consumers could
resell products, allowing those with a higher WTP to have those with a
lower WTP purchase products for them. Therefore, to prevent this GI
could implement a restriction limiting the number of devices per
application subscription, in a similar way to Apple.

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GI should adopt a 2nd degree price discrimination strategy. This decision is

founded on the firms ability to distinguish the characteristics of each type of
consumer, yet not know their individual identities, since customers self select
into sub markets. Thus, ensuring the surplus gained from correct self selection is
maximised, assuming two types of customers with different needs, gaming
enthusiasts (low price sensitivityhigher profit margins) and casual consumers
(high price sensitivitylower profit margins), GI can apply these tactics
(Domowitz, Hubbard and Petersen 1986):
Offer exclusive content at a higher price through in application usage or
timing restrictions e.g. expansion packs/pre-order ability.
Offer quantity deals, e.g. two for one.
Take advantage of early adopters by engaging in price discrimination
over time.
Each tactic aims to give gaming enthusiasts an edge of superiority over the
casual consumer, while making the wrong product, the casual consumers
product, unattractive to them. In this way, GI encourages greater consumption by
gaming enthusiasts, which results in greater profitability.

In theory, there are never any situations, in which a monopolist will charge a
price equal to or less than its marginal costs (except for the last unit sold in 1st
degree price discrimination where P=MC). In such a scenario, the business would
no longer be a monopolist, but rather a competitive firm since P=MC, instead of
MR=MC (Mussa and Rosen 1978). Since competitive firms sell homogenous
products, the failed monopolist has unsuccessfully price discriminated and in
turn possesses no market power. In practice, regulation and third party
agreements can provide scope for PMC.

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Reference List

Domowitz, I., Hubbard, R. G. and Petersen, B. C. 1986, Business cycles and the
relationship between concentration and price-cost margins, The RAND Journal of
Economics, vol. 1, no. 17, pp. 3-6, viewed 18 May 2015, JSTOR.

Guillen, P. 2014, Economics for business decision making, Pearson Education

Australia, Sydney.

Mankiw, N. 2009, Principles of economics. 5th ed., Cengage Learning, South

Western College USA.

Mussa, M. and Rosen, S. 1978, Monopoly and product quality, Journal of

Economic Theory, vol. 18, no. 2, pp. 301-317, viewed 19 May 2015, Elsevier.

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