Figure 123

Monopoly Per-Unit Pricing Versus Two-Part Pricing

When product value varies according to the amount purchased, profits can be enhanced by setting price equal to marginal cost, plus a fee equal to consumers' surplus at that activity level.

(a) Monopoly per-unit pricing (b) Two-part pricing

Because the area of a such a triangle is one-half the value of the base times the height, the value of consumers' surplus equals

Consumers' Surplus = 1/2 [(40 X ($100 - $60)] = $800

In words, this means that at a single-unit price of $60, such an individual will choose to play 40 rounds of golf, resulting in total revenues of $2,400 and total profits of $1,600 for the golf course. The fact that consumers' surplus equals $800 means that the avid golfer in question would have been willing to pay an additional $800 to play these 40 rounds of golf. This is an amount above and beyond the $2,400 paid. The avid golfer received a real bargain.

As an alternative to charging a single-unit price of $60 per round, consider the profits that could be earned using a two-part pricing scheme. To maximize profits, the golf course would choose to charge a per-unit price that equals marginal cost, plus a fixed fee equal to the amount of consumers' surplus received by each consumer at this price. Remember, in Figure 12.3, that the value of consumers' surplus is equal to the region under the demand curve that lies above the per-unit price. When the per-unit price is set equal to marginal cost, P = $20 and Q = 80 because

At the per-unit price of $20 and output level of 80, the value of consumers' surplus equals

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