Profit vs. Efficiency Maximization (Single vs. Discriminating Pricing) – Flash Animation
Publication: Journal of Economic Education
Volume: 37
Issue: 4
Page: 484
Author(s): K. K. Fung, Sri Harsha Kolar, and Pavan Karnam
Address (Principal Author):
K. K. Fung
Professor of Economics
Department of Economics
University of Memphis
3695 Central Avenue
Memphis, TN 38152
Office Phone: (901) 678-4626
Fax Number: (901) 678-2685
Internet Address (Principal Author): kkfung@memphis.edu
Title: Profit vs. Efficiency Maximization (Single vs. Discriminating Pricing) – Flash Animation
URL: http://flashecon.org/natural_monopoly/monopoly.html
Descriptive Note:
Although price discrimination is the dominant pricing strategy of price-searching firms in the real world, most textbooks have treated it as an exception to single pricing. It may be that the comparison between single pricing and discriminatory pricing has always been difficult because of the awkward geometry involved. In particular, a total revenue curve under discriminatory pricing is sorely needed for easy comparison with the total revenue curve under single pricing.
Haveman (1971) names such a total revenue curve “total willingness to pay” (TWP). This curve depicts the total revenue receivable by the seller if perfect price discrimination is practiced. With TWP, the concept of economic surplus suddenly becomes very easy to understand. It is nothing but the difference between TWP and TC. And because the issue of single pricing versus discriminatory pricing involves who gets the economic surplus, the comparison of single pricing and discriminatory pricing also becomes easy.
The contrast between TWP and the familiar total revenue curve under single pricing vs. discriminating pricing can be vividly seen when they are generated dynamically using Flash animation. The superimposition of the maximum-profit output and maximum profit from one pricing strategy on top of those from the other pricing strategy facilitates comparison. With the help of TWP, it is pedagogically sounder to start with discriminating pricing as the dominant pricing strategy and end up with single pricing as an exception.
Flash animation allows for self-paced navigation within each of the 5 animation modules. Such navigational flexibility makes the animations suitable for both classroom presentation and self-paced after-class review.
In addition to the animations, there is a complete package of ancillary materials consisting of notes, short-answer questions, a multiple-choice quiz with instant feedback, and static slides.