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Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.15,0:00:05.72,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:09.47,0:00:10.64,Default,,0000,0000,0000,,- [Tyler] In our last video,
Dialogue: 0,0:00:10.64,0:00:13.80,Default,,0000,0000,0000,,we saw that price discrimination\Nis good for the monopolist.
Dialogue: 0,0:00:13.80,0:00:15.23,Default,,0000,0000,0000,,It increases profits,
Dialogue: 0,0:00:15.23,0:00:17.51,Default,,0000,0000,0000,,but what about \Nfor society as a whole,
Dialogue: 0,0:00:17.51,0:00:20.64,Default,,0000,0000,0000,,does price discrimination\Nincrease social welfare?
Dialogue: 0,0:00:20.64,0:00:22.56,Default,,0000,0000,0000,,That's the topic of today's talk.
Dialogue: 0,0:00:27.77,0:00:30.29,Default,,0000,0000,0000,,It's complicated, but here's\Na rule of thumb --
Dialogue: 0,0:00:30.29,0:00:32.91,Default,,0000,0000,0000,,if price discrimination\Nincreases output
Dialogue: 0,0:00:32.91,0:00:35.19,Default,,0000,0000,0000,,then it's very likely\Nto be beneficial,
Dialogue: 0,0:00:35.19,0:00:37.06,Default,,0000,0000,0000,,to increase social welfare.
Dialogue: 0,0:00:37.06,0:00:39.17,Default,,0000,0000,0000,,If output, however,\Ndoes not increase
Dialogue: 0,0:00:39.17,0:00:41.69,Default,,0000,0000,0000,,then welfare probably is reduced.
Dialogue: 0,0:00:41.69,0:00:42.97,Default,,0000,0000,0000,,Let's give some intuition
Dialogue: 0,0:00:42.97,0:00:46.10,Default,,0000,0000,0000,,for when price discrimination\Nincreases welfare.
Dialogue: 0,0:00:46.10,0:00:47.80,Default,,0000,0000,0000,,Think about our previous example
Dialogue: 0,0:00:47.80,0:00:50.64,Default,,0000,0000,0000,,of the pharmaceutical company GSK
Dialogue: 0,0:00:50.64,0:00:52.60,Default,,0000,0000,0000,,setting a high drug price in Europe
Dialogue: 0,0:00:52.60,0:00:54.89,Default,,0000,0000,0000,,and a lower drug price in Africa.
Dialogue: 0,0:00:54.89,0:00:58.55,Default,,0000,0000,0000,,Suppose that GSK were forced\Nto charge only one price.
Dialogue: 0,0:00:58.98,0:01:02.02,Default,,0000,0000,0000,,Do you think it would charge\Ncloser to the European price
Dialogue: 0,0:01:02.02,0:01:04.29,Default,,0000,0000,0000,,of $12.50 per pill
Dialogue: 0,0:01:04.29,0:01:07.68,Default,,0000,0000,0000,,or closer to the African price\Nof 50 cents per pill?
Dialogue: 0,0:01:08.12,0:01:09.76,Default,,0000,0000,0000,,What's more likely to happen
Dialogue: 0,0:01:09.76,0:01:12.94,Default,,0000,0000,0000,,if GSK is required\Nto set only one price?
Dialogue: 0,0:01:13.44,0:01:15.38,Default,,0000,0000,0000,,If they can't price discriminate,
Dialogue: 0,0:01:15.38,0:01:19.51,Default,,0000,0000,0000,,GSK very likely will simply abandon\Nthe African market
Dialogue: 0,0:01:19.51,0:01:22.10,Default,,0000,0000,0000,,where they weren't making\Nthat much profit anyway
Dialogue: 0,0:01:22.10,0:01:24.01,Default,,0000,0000,0000,,and set a single world price
Dialogue: 0,0:01:24.01,0:01:26.22,Default,,0000,0000,0000,,pretty close to the European level.
Dialogue: 0,0:01:26.71,0:01:29.80,Default,,0000,0000,0000,,People sometimes think that\Nif only everyone were allowed
Dialogue: 0,0:01:29.80,0:01:33.05,Default,,0000,0000,0000,,to import pharmaceuticals\Nto the United States
Dialogue: 0,0:01:33.05,0:01:36.20,Default,,0000,0000,0000,,from Canada, Mexico, or Africa\Nwhere they're cheaper,
Dialogue: 0,0:01:36.20,0:01:38.44,Default,,0000,0000,0000,,then we would all enjoy\Nlower prices.
Dialogue: 0,0:01:38.90,0:01:40.04,Default,,0000,0000,0000,,Probably not.
Dialogue: 0,0:01:40.20,0:01:43.45,Default,,0000,0000,0000,,If smuggling or legal re-importation\Nof pharmaceuticals
Dialogue: 0,0:01:43.45,0:01:44.97,Default,,0000,0000,0000,,were to become more common,
Dialogue: 0,0:01:44.97,0:01:48.73,Default,,0000,0000,0000,,then pharmaceutical companies\Nwould stop price discriminating
Dialogue: 0,0:01:48.73,0:01:50.93,Default,,0000,0000,0000,,and set higher prices for everyone.
Dialogue: 0,0:01:51.89,0:01:55.07,Default,,0000,0000,0000,,Who would be made better off\Nby the resulting single price?
Dialogue: 0,0:01:55.45,0:01:57.35,Default,,0000,0000,0000,,Well, Europeans are not better off
Dialogue: 0,0:01:57.35,0:01:59.36,Default,,0000,0000,0000,,because they're still paying\Na high price
Dialogue: 0,0:01:59.36,0:02:01.29,Default,,0000,0000,0000,,under the single price rule,
Dialogue: 0,0:02:01.29,0:02:03.23,Default,,0000,0000,0000,,but Africans are going\Nto be worse off,
Dialogue: 0,0:02:03.23,0:02:05.28,Default,,0000,0000,0000,,because they will no longer\Nhave the option
Dialogue: 0,0:02:05.28,0:02:08.17,Default,,0000,0000,0000,,of buying important drugs\Nat the lower prices.
Dialogue: 0,0:02:08.88,0:02:11.59,Default,,0000,0000,0000,,In this case,\Nprice discrimination is beneficial
Dialogue: 0,0:02:11.59,0:02:13.70,Default,,0000,0000,0000,,because it increases output.
Dialogue: 0,0:02:13.70,0:02:17.06,Default,,0000,0000,0000,,It gives some Africans\Nthe chance to buy at a lower price
Dialogue: 0,0:02:17.06,0:02:19.39,Default,,0000,0000,0000,,when they otherwise would not\Nhave had that chance
Dialogue: 0,0:02:19.39,0:02:21.96,Default,,0000,0000,0000,,under a no price discrimination rule.
Dialogue: 0,0:02:22.46,0:02:24.66,Default,,0000,0000,0000,,For industries\Nwith high fixed costs,
Dialogue: 0,0:02:24.66,0:02:26.87,Default,,0000,0000,0000,,price discrimination\Nhas another benefit --
Dialogue: 0,0:02:27.33,0:02:30.62,Default,,0000,0000,0000,,the extra profits generated\Nby price discrimination
Dialogue: 0,0:02:30.62,0:02:32.85,Default,,0000,0000,0000,,mean that it's more profitable\Nfor the company
Dialogue: 0,0:02:32.85,0:02:35.27,Default,,0000,0000,0000,,to engage in research\Nand development
Dialogue: 0,0:02:35.27,0:02:37.53,Default,,0000,0000,0000,,to produce more new drugs\Nfor instance.
Dialogue: 0,0:02:38.00,0:02:41.33,Default,,0000,0000,0000,,For example, the extra profits\Nfrom selling in Africa
Dialogue: 0,0:02:41.33,0:02:44.26,Default,,0000,0000,0000,,mean that research\Nand development is more profitable,
Dialogue: 0,0:02:44.26,0:02:46.37,Default,,0000,0000,0000,,and that benefits Europeans too.
Dialogue: 0,0:02:46.67,0:02:48.14,Default,,0000,0000,0000,,When it comes to new drugs,
Dialogue: 0,0:02:48.14,0:02:50.49,Default,,0000,0000,0000,,you might say that misery\Nloves company.
Dialogue: 0,0:02:50.77,0:02:53.56,Default,,0000,0000,0000,,That is, the larger the market\Nfor a potential drug,
Dialogue: 0,0:02:53.56,0:02:56.27,Default,,0000,0000,0000,,the more research\Nand development will be applied.
Dialogue: 0,0:02:56.80,0:03:00.38,Default,,0000,0000,0000,,Price discrimination similarly\Nmeans airlines can offer
Dialogue: 0,0:03:00.38,0:03:03.26,Default,,0000,0000,0000,,more flights to more places\Nat better times,
Dialogue: 0,0:03:03.26,0:03:05.63,Default,,0000,0000,0000,,and that also helps business people.
Dialogue: 0,0:03:05.63,0:03:07.68,Default,,0000,0000,0000,,Even though they're paying\Nthe higher prices,
Dialogue: 0,0:03:07.68,0:03:09.93,Default,,0000,0000,0000,,they have a better chance\Nat being able to get there
Dialogue: 0,0:03:09.93,0:03:12.12,Default,,0000,0000,0000,,at a good time in the first place.
Dialogue: 0,0:03:12.81,0:03:15.68,Default,,0000,0000,0000,,When it comes to software,\Nlower prices for the students
Dialogue: 0,0:03:15.68,0:03:19.30,Default,,0000,0000,0000,,also is going to help\Nsupport software R&D.
Dialogue: 0,0:03:19.71,0:03:22.42,Default,,0000,0000,0000,,If the students wouldn't buy\Nthe software at all
Dialogue: 0,0:03:22.42,0:03:25.44,Default,,0000,0000,0000,,at the higher price,\Nwell then the price discrimination
Dialogue: 0,0:03:25.44,0:03:27.96,Default,,0000,0000,0000,,is a net benefit\Nto pretty much everyone.
Dialogue: 0,0:03:28.32,0:03:31.92,Default,,0000,0000,0000,,More generally, price discrimination\Ncan help spread the fixed costs
Dialogue: 0,0:03:31.92,0:03:35.60,Default,,0000,0000,0000,,of research and development\Nover a larger population,
Dialogue: 0,0:03:35.60,0:03:37.12,Default,,0000,0000,0000,,and that means more innovation
Dialogue: 0,0:03:37.12,0:03:39.70,Default,,0000,0000,0000,,which is to virtually\Neveryone's benefit.
Dialogue: 0,0:03:40.11,0:03:42.47,Default,,0000,0000,0000,,The ultimate form\Nof price discrimination
Dialogue: 0,0:03:42.47,0:03:44.41,Default,,0000,0000,0000,,is when each person is charged
Dialogue: 0,0:03:44.41,0:03:46.74,Default,,0000,0000,0000,,his or her maximum\Nwillingness to pay.
Dialogue: 0,0:03:47.04,0:03:50.57,Default,,0000,0000,0000,,Economists call this\N“perfect price discrimination.”
Dialogue: 0,0:03:50.57,0:03:52.57,Default,,0000,0000,0000,,Under perfect price discrimination,
Dialogue: 0,0:03:52.57,0:03:55.77,Default,,0000,0000,0000,,consumers end up\Nwith zero consumer surplus.
Dialogue: 0,0:03:56.18,0:03:58.84,Default,,0000,0000,0000,,All of the gains from trade\Ngo to the monopolist,
Dialogue: 0,0:03:58.84,0:04:00.97,Default,,0000,0000,0000,,but the efficient quantity\Nis produced.
Dialogue: 0,0:04:00.97,0:04:02.81,Default,,0000,0000,0000,,There's no deadweight loss.
Dialogue: 0,0:04:03.28,0:04:05.37,Default,,0000,0000,0000,,Let's look at this with a diagram.
Dialogue: 0,0:04:05.37,0:04:08.95,Default,,0000,0000,0000,,Think of the demand curve as showing\Nthe maximum willingness to pay
Dialogue: 0,0:04:08.95,0:04:12.100,Default,,0000,0000,0000,,by different individuals to buy\Na single unit of this good.
Dialogue: 0,0:04:13.60,0:04:16.84,Default,,0000,0000,0000,,Here, for example,\Nis Alex's willingness to pay.
Dialogue: 0,0:04:16.84,0:04:20.44,Default,,0000,0000,0000,,Here's Tyler's willingness to pay,\NRobin's, and on,
Dialogue: 0,0:04:20.44,0:04:23.73,Default,,0000,0000,0000,,all the way down to Brian's\Nwillingness to pay for the good.
Dialogue: 0,0:04:24.26,0:04:27.54,Default,,0000,0000,0000,,If the monopolist could charge\Neach and every consumer
Dialogue: 0,0:04:27.54,0:04:29.63,Default,,0000,0000,0000,,his or her maximum\Nwillingness to pay,
Dialogue: 0,0:04:29.63,0:04:32.51,Default,,0000,0000,0000,,the monopolist would walk\Ndown the demand curve
Dialogue: 0,0:04:32.51,0:04:35.98,Default,,0000,0000,0000,,producing each unit such\Nthat the willingness to pay
Dialogue: 0,0:04:35.98,0:04:37.92,Default,,0000,0000,0000,,just exceeded the marginal cost.
Dialogue: 0,0:04:38.77,0:04:41.91,Default,,0000,0000,0000,,In other words, the monopolist\Nwould produce every unit
Dialogue: 0,0:04:41.91,0:04:44.82,Default,,0000,0000,0000,,up until the efficient\Nquantity of output,
Dialogue: 0,0:04:44.82,0:04:48.35,Default,,0000,0000,0000,,the same quantity as would be\Nproduced by a competitive industry.
Dialogue: 0,0:04:48.35,0:04:51.56,Default,,0000,0000,0000,,The difference being that\Nin the competitive industry,
Dialogue: 0,0:04:51.56,0:04:53.88,Default,,0000,0000,0000,,the gains would go\Nto the consumers.
Dialogue: 0,0:04:54.43,0:04:56.75,Default,,0000,0000,0000,,In the case of\Nperfect price discrimination,
Dialogue: 0,0:04:56.75,0:04:58.91,Default,,0000,0000,0000,,all the gains go to the monopolist.
Dialogue: 0,0:04:59.20,0:05:02.59,Default,,0000,0000,0000,,This kind of price discrimination\Nrequires that the monopolist
Dialogue: 0,0:05:02.59,0:05:05.18,Default,,0000,0000,0000,,have a lot of information\Nabout each consumer.
Dialogue: 0,0:05:05.77,0:05:08.14,Default,,0000,0000,0000,,Are there examples\Nof this in practice?
Dialogue: 0,0:05:08.36,0:05:09.73,Default,,0000,0000,0000,,In fact there are some,
Dialogue: 0,0:05:09.99,0:05:12.47,Default,,0000,0000,0000,,and you may be very familiar\Nwith one of them.
Dialogue: 0,0:05:12.92,0:05:16.05,Default,,0000,0000,0000,,Universities are fabulous\Nprice discriminators.
Dialogue: 0,0:05:16.05,0:05:17.93,Default,,0000,0000,0000,,They're even better than the airlines,
Dialogue: 0,0:05:17.93,0:05:21.76,Default,,0000,0000,0000,,especially because few people\Nrealize what is actually going on.
Dialogue: 0,0:05:22.19,0:05:25.37,Default,,0000,0000,0000,,Universities give many students\Nfinancial aid,
Dialogue: 0,0:05:25.37,0:05:27.34,Default,,0000,0000,0000,,which is another way\Nof saying that they charge\N
Dialogue: 0,0:05:27.34,0:05:29.60,Default,,0000,0000,0000,,some of their students\Nmore than others.
Dialogue: 0,0:05:30.06,0:05:33.13,Default,,0000,0000,0000,,Financial aid is a way\Nof doing well while doing good
Dialogue: 0,0:05:33.13,0:05:35.67,Default,,0000,0000,0000,,because it's a form\Nof price discrimination.
Dialogue: 0,0:05:35.67,0:05:38.14,Default,,0000,0000,0000,,It increases profits\Nfor universities.
Dialogue: 0,0:05:38.44,0:05:39.94,Default,,0000,0000,0000,,Moreover, to get the aid,
Dialogue: 0,0:05:39.94,0:05:42.71,Default,,0000,0000,0000,,students and their parents\Nmust give the university
Dialogue: 0,0:05:42.71,0:05:45.43,Default,,0000,0000,0000,,an incredible amount\Nof financial information,
Dialogue: 0,0:05:45.43,0:05:48.55,Default,,0000,0000,0000,,including their tax forms,\Ntheir W2's,
Dialogue: 0,0:05:48.55,0:05:50.56,Default,,0000,0000,0000,,information\Nabout their bank accounts,
Dialogue: 0,0:05:50.56,0:05:52.40,Default,,0000,0000,0000,,the home they own and so on.
Dialogue: 0,0:05:52.85,0:05:56.31,Default,,0000,0000,0000,,All of this information means \Nthe universities can create
Dialogue: 0,0:05:56.31,0:05:58.04,Default,,0000,0000,0000,,many, many different prices
Dialogue: 0,0:05:58.04,0:06:01.32,Default,,0000,0000,0000,,in a way that approaches\Nperfect price discrimination.
Dialogue: 0,0:06:01.65,0:06:03.63,Default,,0000,0000,0000,,At Williams College for instance,
Dialogue: 0,0:06:03.63,0:06:05.87,Default,,0000,0000,0000,,half the students pay full fare,
Dialogue: 0,0:06:05.87,0:06:08.74,Default,,0000,0000,0000,,which is about $32,000 a year.
Dialogue: 0,0:06:08.74,0:06:11.37,Default,,0000,0000,0000,,The other half gets some form\Nof financial aid,
Dialogue: 0,0:06:11.37,0:06:13.53,Default,,0000,0000,0000,,but the amount varies tremendously.
Dialogue: 0,0:06:14.03,0:06:19.22,Default,,0000,0000,0000,,Students whose parents have incomes\Nof about $91,000 a year or higher,
Dialogue: 0,0:06:19.22,0:06:23.62,Default,,0000,0000,0000,,they pay an average in tuition\Nof about $22,000 a year.
Dialogue: 0,0:06:23.62,0:06:25.90,Default,,0000,0000,0000,,While students\Nfrom very poor families
Dialogue: 0,0:06:25.90,0:06:29.56,Default,,0000,0000,0000,,may pay as little as $1,600 a year.
Dialogue: 0,0:06:29.80,0:06:31.24,Default,,0000,0000,0000,,That's meaning\Nthat one price can be
Dialogue: 0,0:06:31.24,0:06:33.98,Default,,0000,0000,0000,,about 20 times higher\Nthan the other.
Dialogue: 0,0:06:33.98,0:06:36.04,Default,,0000,0000,0000,,That's a lot of price discrimination.
Dialogue: 0,0:06:36.54,0:06:39.73,Default,,0000,0000,0000,,Price discrimination makes\Na lot of sense for universities
Dialogue: 0,0:06:39.73,0:06:41.73,Default,,0000,0000,0000,,because their marginal costs are low
Dialogue: 0,0:06:41.73,0:06:43.82,Default,,0000,0000,0000,,while their fixed costs\Nare pretty high.
Dialogue: 0,0:06:44.13,0:06:47.70,Default,,0000,0000,0000,,If a professor is teaching\NEconomics 101 anyway,
Dialogue: 0,0:06:47.70,0:06:51.10,Default,,0000,0000,0000,,then the marginal cost of putting\Nan extra student in the classroom
Dialogue: 0,0:06:51.10,0:06:52.84,Default,,0000,0000,0000,,is pretty close to zero.
Dialogue: 0,0:06:53.13,0:06:56.74,Default,,0000,0000,0000,,Even a student who is paying\Na smaller amount in tuition
Dialogue: 0,0:06:56.74,0:06:59.78,Default,,0000,0000,0000,,is probably adding more\Nto profits than to costs.
Dialogue: 0,0:07:00.04,0:07:03.20,Default,,0000,0000,0000,,That helps the university\Ncover its fixed costs
Dialogue: 0,0:07:03.20,0:07:05.46,Default,,0000,0000,0000,,such as the salaries\Nand the buildings
Dialogue: 0,0:07:05.46,0:07:08.92,Default,,0000,0000,0000,,necessary to support\Nthe operations of the university.
Dialogue: 0,0:07:09.51,0:07:12.52,Default,,0000,0000,0000,,So again, price discrimination\Nby the universities
Dialogue: 0,0:07:12.52,0:07:14.20,Default,,0000,0000,0000,,increases profits,
Dialogue: 0,0:07:14.20,0:07:17.50,Default,,0000,0000,0000,,but it also probably increases\Ntheir output as well.
Dialogue: 0,0:07:17.50,0:07:21.68,Default,,0000,0000,0000,,More students attend university\Nthan otherwise would be the case.
Dialogue: 0,0:07:21.68,0:07:25.72,Default,,0000,0000,0000,,And again, price discrimination\Nalso helps to spread the fixed costs
Dialogue: 0,0:07:25.72,0:07:28.31,Default,,0000,0000,0000,,around a larger number\Nof customers.
Dialogue: 0,0:07:28.56,0:07:31.96,Default,,0000,0000,0000,,For these reasons,\Nprice discrimination by universities
Dialogue: 0,0:07:31.96,0:07:34.66,Default,,0000,0000,0000,,probably increases social welfare.
Dialogue: 0,0:07:35.04,0:07:38.56,Default,,0000,0000,0000,,That's it for the more obvious\Nforms of price discrimination.
Dialogue: 0,0:07:38.56,0:07:40.26,Default,,0000,0000,0000,,In the next talk we'll be looking
Dialogue: 0,0:07:40.26,0:07:42.78,Default,,0000,0000,0000,,at some quite common\Npricing strategies,
Dialogue: 0,0:07:42.78,0:07:44.47,Default,,0000,0000,0000,,such as tying and bundling,
Dialogue: 0,0:07:44.47,0:07:46.13,Default,,0000,0000,0000,,which also can be understood
Dialogue: 0,0:07:46.13,0:07:49.31,Default,,0000,0000,0000,,as more subtle forms\Nof price discrimination.
Dialogue: 0,0:07:51.07,0:07:52.69,Default,,0000,0000,0000,,- [Announcer] If you want\Nto test yourself,
Dialogue: 0,0:07:52.69,0:07:54.20,Default,,0000,0000,0000,,click “Practice Questions.”
Dialogue: 0,0:07:55.02,0:07:58.27,Default,,0000,0000,0000,,Or, if you're ready to move on,\Njust click “Next Video.”
Dialogue: 0,0:07:58.50,0:08:02.40,Default,,0000,0000,0000,,♪ [music] ♪