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Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:01.92,0:00:04.70,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:09.37,0:00:13.78,Default,,0000,0000,0000,,- In our last video, we saw that price\Ndiscrimination is good for the monopolist.
Dialogue: 0,0:00:13.96,0:00:17.93,Default,,0000,0000,0000,,It increases profits, but what about for\Nsociety as a whole, this price
Dialogue: 0,0:00:18.11,0:00:24.36,Default,,0000,0000,0000,,discrimination increase social welfare?\NThat's the topic of today's talk.
Dialogue: 0,0:00:28.03,0:00:32.14,Default,,0000,0000,0000,,It's complicated but here's a rule of\Nthumb, if price discrimination increases
Dialogue: 0,0:00:32.32,0:00:37.24,Default,,0000,0000,0000,,output then it's very likely to be\Nbeneficial to increase social welfare, if
Dialogue: 0,0:00:37.42,0:00:42.00,Default,,0000,0000,0000,,output however does not increase then\Nwelfare probably is reduced. Let's give
Dialogue: 0,0:00:42.18,0:00:46.30,Default,,0000,0000,0000,,some intuition for when price\Ndiscrimination increases welfare. Think
Dialogue: 0,0:00:46.48,0:00:51.26,Default,,0000,0000,0000,,about our previous example of the\Npharmaceutical company GSK setting a high
Dialogue: 0,0:00:51.44,0:00:56.30,Default,,0000,0000,0000,,drug price in Europe and they lower drug\Nprice in Africa. Suppose that GSK were
Dialogue: 0,0:00:56.48,0:01:00.74,Default,,0000,0000,0000,,forced to charge only one price. Do you\Nthink it would charge closer to the
Dialogue: 0,0:01:00.92,0:01:06.91,Default,,0000,0000,0000,,European price of $12.50 per pill or\Ncloser to the African price of 50 cents
Dialogue: 0,0:01:07.09,0:01:13.59,Default,,0000,0000,0000,,per pill? What's more likely to happen if\NGSK's required to set only one price? If
Dialogue: 0,0:01:13.77,0:01:18.72,Default,,0000,0000,0000,,they can't price discriminate, GSK very\Nlikely will simply abandon the African
Dialogue: 0,0:01:18.90,0:01:24.05,Default,,0000,0000,0000,,market for they weren't making that much\Nprofit anyway and set a single world price
Dialogue: 0,0:01:24.23,0:01:29.41,Default,,0000,0000,0000,,pretty close to the European level. People\Nsometimes think that if only everyone were
Dialogue: 0,0:01:29.59,0:01:34.58,Default,,0000,0000,0000,,aloud to import pharmaceuticals to the\NUnited States from Canada, Mexico or
Dialogue: 0,0:01:34.76,0:01:40.23,Default,,0000,0000,0000,,Africa where they're cheaper then we would\Nall enjoy lower prices. Probably not.
Dialogue: 0,0:01:40.41,0:01:45.03,Default,,0000,0000,0000,,Smuggling or illegal re-emportation of\Npharmaceuticals were to become more common
Dialogue: 0,0:01:45.21,0:01:49.82,Default,,0000,0000,0000,,than pharmaceutical companies would stop\Nprice discriminating and set higher prices
Dialogue: 0,0:01:50.00,0:01:55.95,Default,,0000,0000,0000,,for everyone. Who would be made better off\Nby the resulting single price? Well,
Dialogue: 0,0:01:56.13,0:01:59.59,Default,,0000,0000,0000,,Europeans are not better off because\Nthey're still paying a high price under
Dialogue: 0,0:01:59.77,0:02:03.25,Default,,0000,0000,0000,,the single price rule, but Africans are\Ngoing to be worse off.
Dialogue: 0,0:02:03.43,0:02:06.88,Default,,0000,0000,0000,,Because they will no longer have the\Noption of buying important drugs at the
Dialogue: 0,0:02:07.06,0:02:12.05,Default,,0000,0000,0000,,lower prices. In this case, price\Ndiscrimination is beneficial because it
Dialogue: 0,0:02:12.23,0:02:17.23,Default,,0000,0000,0000,,increases output. It gives some Africans\Nthe chance to buy at a lower price when
Dialogue: 0,0:02:17.41,0:02:21.03,Default,,0000,0000,0000,,they otherwise would not have had that\Nchance under a no price discrimination
Dialogue: 0,0:02:21.21,0:02:27.22,Default,,0000,0000,0000,,rule. For industries with high fixed costs\Nprice discrimination has another benefit,
Dialogue: 0,0:02:27.40,0:02:31.33,Default,,0000,0000,0000,,the extra profits generated by price\Ndiscrimination mean that it's more
Dialogue: 0,0:02:31.51,0:02:35.95,Default,,0000,0000,0000,,profitable for the company to engage in\Nresearch and development to produce more
Dialogue: 0,0:02:36.13,0:02:41.52,Default,,0000,0000,0000,,new drugs for instance. For example the\Nextra profits from selling in Africa mean
Dialogue: 0,0:02:41.70,0:02:45.61,Default,,0000,0000,0000,,that research and development is more\Nprofitable, and that benefits Europeans
Dialogue: 0,0:02:45.79,0:02:51.28,Default,,0000,0000,0000,,too. When it comes to new drugs, you might\Nsay that misery loves company. That is the
Dialogue: 0,0:02:51.46,0:02:55.35,Default,,0000,0000,0000,,larger the market for a potential drug the\Nmore research and development will be
Dialogue: 0,0:02:55.53,0:03:01.21,Default,,0000,0000,0000,,applied. Price discrimination similarly\Nmeans airlines can offer more flights to
Dialogue: 0,0:03:01.39,0:03:06.08,Default,,0000,0000,0000,,more places at better times, and that also\Nhelps business people. Even though they're
Dialogue: 0,0:03:06.26,0:03:09.76,Default,,0000,0000,0000,,paying the higher prices, they have a\Nbetter chance at being able to get there
Dialogue: 0,0:03:09.94,0:03:15.04,Default,,0000,0000,0000,,at a good time in the first place. When it\Ncomes to software, lower price is for the
Dialogue: 0,0:03:15.22,0:03:20.81,Default,,0000,0000,0000,,students also is going to help support\Nsoftware R and D. If the students wouldn't
Dialogue: 0,0:03:20.99,0:03:25.48,Default,,0000,0000,0000,,buy the software at all at the higher\Nprice, well, then the price discrimination
Dialogue: 0,0:03:25.66,0:03:30.45,Default,,0000,0000,0000,,is a net benefit to pretty much everyone.\NMore generally price discrimination can
Dialogue: 0,0:03:30.63,0:03:35.55,Default,,0000,0000,0000,,help spread the fixed costs of research\Nand development over a larger population
Dialogue: 0,0:03:35.73,0:03:40.59,Default,,0000,0000,0000,,and that means more innovation which is to\Nvirtually everyone's benefit. The ultimate
Dialogue: 0,0:03:40.77,0:03:45.43,Default,,0000,0000,0000,,form of price discrimination is when each\Nperson is charged his or her maximum
Dialogue: 0,0:03:45.61,0:03:50.84,Default,,0000,0000,0000,,willingness to pay. Economist call this\N'perfect price discrimination,' under
Dialogue: 0,0:03:51.02,0:03:56.54,Default,,0000,0000,0000,,perfect price discrimination consumers end\Nup with zero consumers surplus. All of the
Dialogue: 0,0:03:56.72,0:04:00.98,Default,,0000,0000,0000,,gains from trade go to the monopolist, but\Nthe efficient quantity is produced.
Dialogue: 0,0:04:01.16,0:04:06.10,Default,,0000,0000,0000,,There's no dead weight loss. Let's look at\Nthis with a diagram. Think of the demand
Dialogue: 0,0:04:06.28,0:04:10.84,Default,,0000,0000,0000,,curve as showing the maximum willingness\Nto pay by different individuals to buy a
Dialogue: 0,0:04:11.02,0:04:17.03,Default,,0000,0000,0000,,single unit of this good. Here for example\Nis Alex's willingness to pay, here's
Dialogue: 0,0:04:17.21,0:04:22.32,Default,,0000,0000,0000,,Tyler's willingness to pay, Robin's and on\Nall the way down to Brian's willingness to
Dialogue: 0,0:04:22.50,0:04:27.89,Default,,0000,0000,0000,,pay for the good. If the monopolist could\Ncharge each and every consumer his or her
Dialogue: 0,0:04:28.07,0:04:33.02,Default,,0000,0000,0000,,maximum willingness to pay, the monopolist\Nwould walk down the demand curve producing
Dialogue: 0,0:04:33.20,0:04:38.98,Default,,0000,0000,0000,,each unit such that the willingness to pay\Njust exceeded the marginal cost. In other
Dialogue: 0,0:04:39.16,0:04:43.89,Default,,0000,0000,0000,,words the monopolist would produce every\Nunit up until the efficient quantity of
Dialogue: 0,0:04:44.07,0:04:48.68,Default,,0000,0000,0000,,output, the same quantity as would be\Nproduced by a competitive industry. The
Dialogue: 0,0:04:48.86,0:04:52.73,Default,,0000,0000,0000,,difference being that in the competitive\Nindustry the gains would go to the
Dialogue: 0,0:04:52.91,0:04:57.79,Default,,0000,0000,0000,,consumers. In the case of perfect price\Ndiscrimination, all the gains go to the
Dialogue: 0,0:04:57.97,0:05:01.67,Default,,0000,0000,0000,,monopolist. This kind of price\Ndiscrimination requires that the
Dialogue: 0,0:05:01.85,0:05:07.08,Default,,0000,0000,0000,,monopolist have a lot of information about\Neach consumer. Are there examples of this
Dialogue: 0,0:05:07.26,0:05:12.85,Default,,0000,0000,0000,,in practice? In fact there are some, and\Nyou maybe very familiar with one of them.
Dialogue: 0,0:05:13.03,0:05:16.84,Default,,0000,0000,0000,,Universities are fabulous price\Ndiscriminators. They're even better than
Dialogue: 0,0:05:17.02,0:05:22.15,Default,,0000,0000,0000,,airlines, especially because few people\Nrealize what is actually going on.
Dialogue: 0,0:05:22.33,0:05:26.88,Default,,0000,0000,0000,,Universities give many students financial\Naid, which is another way of saying that
Dialogue: 0,0:05:27.06,0:05:31.36,Default,,0000,0000,0000,,they charge some of their students more\Nthan others. Financial aid is a way of
Dialogue: 0,0:05:31.54,0:05:36.27,Default,,0000,0000,0000,,doing well while doing good because it's a\Nform of price discrimination. It increases
Dialogue: 0,0:05:36.45,0:05:41.60,Default,,0000,0000,0000,,profits for universities. Moreover to get\Nthe aid, students and their parents must
Dialogue: 0,0:05:41.78,0:05:46.03,Default,,0000,0000,0000,,give the university an incredible amount\Nto financial information, including their
Dialogue: 0,0:05:46.21,0:05:51.64,Default,,0000,0000,0000,,tax forms, their W2's, information about\Ntheir bank accounts, the home they own and
Dialogue: 0,0:05:51.82,0:05:56.93,Default,,0000,0000,0000,,so on. All of this information means the\Nuniversities can create many many
Dialogue: 0,0:05:57.11,0:06:01.64,Default,,0000,0000,0000,,different prices in a way that approaches\Nperfect price discrimination.
Dialogue: 0,0:06:01.82,0:06:06.46,Default,,0000,0000,0000,,At William's College for instance, half\Nthe students pay full fare. Which is about
Dialogue: 0,0:06:06.64,0:06:11.85,Default,,0000,0000,0000,,$32,000 a year, the other half gets some\Nform of financial aid but the amount
Dialogue: 0,0:06:12.03,0:06:18.09,Default,,0000,0000,0000,,varies tremendously. Students whose\Nparents have incomes of about $91,000 a
Dialogue: 0,0:06:18.27,0:06:23.94,Default,,0000,0000,0000,,year or higher, they pay an average\Nintuition of about $22,000 a year. While
Dialogue: 0,0:06:24.12,0:06:30.11,Default,,0000,0000,0000,,students from very poor families may pay\Nas little as $1,600 a year. That's
Dialogue: 0,0:06:30.11,0:06:34.95,Default,,0000,0000,0000,,meaning that one price can be about 20\Ntimes higher than the other, that's a lot
Dialogue: 0,0:06:34.95,0:06:38.75,Default,,0000,0000,0000,,of price discrimination. Price\Ndiscrimination makes a lot of sense for
Dialogue: 0,0:06:38.75,0:06:43.03,Default,,0000,0000,0000,,universities because their marginal costs\Nare low while their fixed costs are pretty
Dialogue: 0,0:06:43.03,0:06:48.49,Default,,0000,0000,0000,,high. If a professor is teaching\Neconomics 101 anyway, then the marginal
Dialogue: 0,0:06:48.49,0:06:53.59,Default,,0000,0000,0000,,cost of putting an extra student in the\Nclassroom is pretty close to zero. Even a
Dialogue: 0,0:06:53.59,0:06:58.73,Default,,0000,0000,0000,,student who is paying a smaller amount in\Ntuition is probably adding more to profits
Dialogue: 0,0:06:58.73,0:07:04.53,Default,,0000,0000,0000,,than to costs. That helps the university\Ncover its fixed costs such as the salaries
Dialogue: 0,0:07:04.53,0:07:10.28,Default,,0000,0000,0000,,and the buildings necessary to support the\Noperations of the university. So again
Dialogue: 0,0:07:10.28,0:07:15.45,Default,,0000,0000,0000,,price discrimination by the universities\Nincreases profits but it also probably
Dialogue: 0,0:07:15.45,0:07:20.52,Default,,0000,0000,0000,,increases their output as well. More\Nstudents attend university then otherwise
Dialogue: 0,0:07:20.52,0:07:25.17,Default,,0000,0000,0000,,would be the case. And again, price\Ndiscrimination also helps to spread the
Dialogue: 0,0:07:25.17,0:07:30.52,Default,,0000,0000,0000,,fixed costs around a larger number of\Ncustomers. For these reasons, price
Dialogue: 0,0:07:30.52,0:07:35.78,Default,,0000,0000,0000,,discrimination by universities probably\Nincrease the social welfare. That's it for
Dialogue: 0,0:07:35.78,0:07:39.87,Default,,0000,0000,0000,,the more obvious forms of price\Ndiscrimination. In the next talk we'll be
Dialogue: 0,0:07:39.87,0:07:44.23,Default,,0000,0000,0000,,looking at the some quite common pricing\Nstrategies, such as tying and bundling,
Dialogue: 0,0:07:44.23,0:07:49.37,Default,,0000,0000,0000,,which also can be understood as more\Nsubtle forms of price discrimination.
Dialogue: 0,0:07:51.18,0:07:54.66,Default,,0000,0000,0000,,- If you want to test yourself, click\Npractice questions.
Dialogue: 0,0:07:54.80,0:07:58.37,Default,,0000,0000,0000,,Or, if you're ready to move on,\Njust click 'next video.'
Dialogue: 0,0:07:59.49,0:08:02.14,Default,,0000,0000,0000,,♪ [music] ♪