Introduction.
The combined demand function is attained by summing individual market demands which comprises of the tourist demand function and the local demand function altogether. The price to be charged for ecological license fee is also computed. The choker price is also computed. Choker price is the minimum price at which the quantity demanded of a good is equal to zero. It is mostly use to refer to commodity price. profit maximisation level has also been calculated. . There are several methods of pricing for products in the market. This includes price discrimination and uniform pricing. Price discrimination is the condition in which the seller charges different prices to different consumers for the same product. For price discrimination to take place the following conditions are necessary;
- The consumers should not be on the same geographical market.
- The cost of maintaining the separate markets should not be high.
- Consumers should not be aware of the market prices of the commodities.
- The government legislation should not outlaw price discrimination.
- It is difficult for other firms to enter into the industry.
- The commodities supplied should not be having close substitutes.
STEP 1.
COMBINED DEMAND FUNCTION.
- The total or combined demand function is derived simply by adding together individual market demand functions.
Here,
Qi(P)=4000-P…tourist demand function.
Qi(P)=2000-2P…local demand function
Thus, the combiner market demand function.;
=Qc(P)=6000-3P
STEP 2.
TOTAL COST
- Let E represent ecological license fee levied yearly. This fees levied by the state/government. To bring back to the place where tourism activities took place to its initial inherent level. As we know that in any places that are important (whichexperiences huge tourist attractions and footfalls from across the world) man’s activities brings about contamination and impacts the natural atmosphere of the place in a negative manner. The tourism sector should not be brought down completely to avoid this as it contributes to the GDP and creates employment. Therefore, the state levies a standard ecological license fee to tourism operators to bear the cost of clean-up, abatement of pollution and restoration.
Total costs are given by the following general formula;
TC=FC+VC
According to the problem, the total Cost Function C(Q) will be –]; C(Q)=200Q+E
However, if we exclude this license fee then Cost Function is
C(Q)=200Q
Here, fixed costs=0
And variable cost =$200 per ticket
STEP 3.
CHOKE PRICE.
Choke price is a price where demand =0. In other words, it means there is nobody who is willing to buy this good if the prices reach this level or above.
Therefore, for the locals the choke price is calculated by setting Ql(P)=0
Here, chokes price for locals is P=2000/2=$1000
And choke price for the combined market=6000/3=$2000
To find the profit-maximizing price, we have to first find profit function(π) So, π=Revenue-Cost
Revenue function=P*Q=Q*(3000-1/3Q)
=3000Q-1/3Q^2
Π=3000Q-1/3Q^2 -200Q
Maximizing the above function by finding its first derivative and then setting it equal We get
***=2800-2/3Q=0
Therefore, profit maximizing Q=4200 and
P=$600… [(6000-4200)/3]
As mentioned above, our choke price for locals was $1000 and our assumption was profit maximizing price being below choke price. Therefore, it can be concluded from the calculations that the profit maximizing price is indeed consistent with our assumption.
STEP 4.
Now let us assume profit maximizing price is above choke price of locals.
Using the same method above we find that at profit maximizing level Q=1900 and P=$2100 from tourist demand function.
If the price is set at this level i.e.at$2100 then no tickets will be sold in the local’s market. However, it may be sold in the tourist market as choke price in the tourist market is=$4000.Therefore, the profit maximizing price is consistent with our assumption only in the tourist market.
In combined markets or local markets this price is not the profit maximizing price and hence inconsistent with our assumption.
STEP 5.
UNIFORM PRICING
It is a condition in which the seller charges similar price for the same product for different customers. It is clear that price collusion in price discrimination policy is higher than in uniform pricing (Delavigne &Gentzkow, 2019, PG.2083). This brings about the consequences in consumer’s surplus.
Demand function is obtained by adding together the individual market demands which is made up of tourist demand function and local demand function. ecological license fee.
choke price which is the lowest price at which the quantity demanded of a good is equal to zero.
In profit maximisation it is assumed that the producer is only one. There is also product differentiation as result of lack of substitutes (Jeitschko, Jung& Kim, 2017, pg.572).
Consider the given problem here there are the types of****‘‘Tourist demand’’ & ‘‘local demand’’
Now, under the uniform pricing a single price will changed. So the aggregate demand curve is the horizontal summation of the individual demand curve. The Aggregate demand is given below-
Q=Qr+Ql=(4000-P) +(2000-2P)
Q=6000-3P, 3P=6000-Q
P=2000-Q/3, MR=2000-2Q/3
Now the “MC=200’’ At optimum “MR=MC’’
2000-2Q/3=200
2Q/3=1800
2Q=1800*3
Q=5400/2
Q=2700
The market price is;
P=2000-Q/3=1100
P=1100.
The producer surplus under the uniform pricing is
PS=(P-MC) *Q= (1100-200) *2700
$ 2,430,000.
IMPORTANCE OF UNIFORM PRICING
- It promotes equity; this is possible because it realises a fair value for all the stockholders in the market.
- It promotes innovation; this is as a result of stiff competition which makes the participants innovative to obtain low cost resources.
- Act as incentives for suppliers; suppliers are offers at the lowest acceptable price to maximize their likelihood of clearing profitability.
- Benefits the consumer; this is through minimising in the long run costs which are relatively lower when Societal costs are minimized (Shiller &Waldfogel, 2011, Pg. .631).
STEP 6.
LOCAL DEMAND FUNCTION
The local demand function is given by
QL=2000-2P, P=1100, QL=2000-2*1100
= (-200) <0
Now</0
The local consumer having willingness to pay less than “P=1100’’
The “CS’’of local consumer is “200’
STEP 7.
EQUILLIBRIUM QUANTITY
Here the equilibrium quantity is Q=2700 & QL=0
QT=Q=2700
Total members of the tickets sold to tourist consumer is“ QT=2700’’
The demand for tourist is given by
P=4000-Q
The maximum willingness to pay is 4000
The “Cs’’ is given by
Cs= (4000-1100) *2700*0.5=$3,915,000
STEP 8.
PROFIT-MAXIMIZING QUANTITY, LOCAL MARKET PRICE AND CONSUMER SURPLUS IN THE LOCAL MARKET
Under the price discrimination the different price will be charged.
The demand curve for tourist consumer is
Qr=4000-P
P=4000-Qr
MRT=4000-2QR, similarly, the demand curve for local consumer is Ql=2000-2P
P=1000-Q L/L
MRl=1000-Ql
At the optimum-MRl=MC=200
4000-2Q=200
Ql= (4000-200)/2=1900
Qr=1900
The corresponding price is PR=4000-Qr
PR=4000-1900=2100, Pr=2100
Similarly, by-PL=1000-QL=200
Ql=800
Pl=1000-Ql=900
Pl=900
The profit maximizing price & quantity for the local market are Pl=900, Ql=800
So the Cs of the local market is-
Csl=0.5*(1000-900) *Ql
=0.5*100*800=CSl=40000
STEP 9.
CONSUMER SURPLUS UNDER PRICE DISCRIMINATION.
The market price &quantity of tourist market is given by-Ql=1900& Pr=2100
The consumer surplus is given by-
CST=0.5*(4000-Pr) *QT=0.5*(4000-2100) *1900
CST=$1,805,000
STEP 10.
PRODUCER SURPLUS UNDER PRICE DISCRIMINATION.
The PS under the given result is
Ps=(PT-200) *QT+(PL-200) *QL
= (2100-200) *1900+(900-200) *800
PS=$3,610,000+$560,000=$4,170,000
Ps=$4,170,000
CONSEQUENCES OF PRICE DISCRIMINATION AND UNIFORM PRICING. For uniform pricing to thrive ,the following conditions are necessary;
- The seller should be engaging in one uniform commodity.
- The consumers should be spread all over the market.
- The consumers should be homogenous and with a demand curve.
In price discrimination the seller charges the consumers the maximum price they are able to pay .Price discrimination is widely applicable in companies willing to generate the most revenue.For instance in movies ticket prices for children ,adults and seniors vary.Though the cost of production remains constant, the producer s raises the price on the basis of location, financial status of the customer and the demand for the product(Simshauser &Whish, 2017, pg.93).For price discrimination to take place the following conditions are necessary:
- The country’s legislation doesn’t outlaws the practice.
- Consumers should be located in different geographical locations.
- Consumers should be aware of the commodities prices in the market.
FORMS OF PRICE DISCRIMINATION
- Local discrimination; this involves levying a varying price in home market and the foreign market, for instance, charging a lower price in the home market and a higher price in the foreign market.
- Personal discrimination; this refers to charging different individuals different prices based on their individual capacities.
- Trade discrimination; this involves charging different prices for different trades and occupation (Borgesius & Poort, 2017,350).
Price discrimination brings about the following positive consequences:
- It enables a firm to attain a monopoly status.
- It enables the company to generate higher profits.
- Total output in the company is greatly raised.
- It promotes innovation; it enables the company to attain monopoly status which will act as the patent incentive for the employees to devise several ways of ensuring customer satisfaction.
- Investments; this is achieved through continuous profit generation enabling it to deliver the services to the community.
- It enables unprofitable business to avoid bankruptcy. This is because firms are able to convert a loss into being a small profit. It also increases consumer’s choice.
However important price discrimination is, it exploits the consumers as distinct consumers are made to pau different prices implying that, every consumer is charged the maximum price he can pay. Price discrimination also may lead to diseconomies of scale. When the company attains monopoly standards its scale of operation increases which makes the management of the company complex and more bureaucratic (Rudyard, 2017, pg.317). Price discrimination also denies the consumers an opportunity to bargain. In price discrimination the seller determines the price he charges its customers and thus negating the impact of bargaining by customers. It also may lead to production of inferior goods; this happens when the company attains monopoly status and this makes it difficult for other similar firms to enter into the industry due to; financial and restrictive practices. This poses no competition to the firm and this may make it to produce the substandard goods. On the other hand, the uniform pricing policy competition to this government agency since it will dictate the market and continue to generate higher revenues thus the department role of using it as a substantial source of revenue. Adopting and charging of different prices to different customers will also leads to an increase in general output. Since the department generates higher profits from the price discrimination policy, the stakeholders interest will be taken care of, for instance the community will benefit from the Corporate Social Responsibility carried out by the company. The employees who are also the stakeholders are guaranteed greener pastures from the highly generated profit and their input is appraised. The management are credited with a good reputation through higher and continuous profit generation and thus the minister is applauded by the state. Uniform pricing is important as it benefits the locals in the country (Aguirre, Cowan &Vickers, 2010, pg.1617).
CONCLUSION.
Different firms adopt to different pricing policies for their products. This is based on several key factors pertaining the company. Pricing policies ranges from price discrimination to uniform pricing. The core aim of several firms is profit and wealth maximisation. The two are the major goals of any profitable entity. To achieve this the department needs to generate higher profits and align this to the objective of using the project as one of the vast sources of government revenue. For these reasons, the companies find price discrimination as the most appropriate pricing policy for their commodities. The DENR in this article should therefore adopts this pricing policy, since it is in line with its objectives of using it as a substantial source of revenue and caters for for the interest of the society, the government, employees and the management who are the main interested parties. This is also in line with the locals who are of the opinion of the two price structure to lock out crowding foreign investors in the country.
REFERENCES.
Aguirre, I., Cowan, S. and Vickers, J., 2010. Monopoly price discrimination and demand curvature. American Economic Review, 100(4), pp.1601-15.
Borgesius, F.Z. and Poort, J., 2017. Online price discrimination and EU data privacy law. Journal of consumer policy, 40(3), pp.347-366.
DellaVigna, S. and Gentzkow, M., 2019. Uniform pricing in us retail chains. The Quarterly Journal of Economics, 134(4), pp.2011-2084.
Jeitschko, T.D., Jung, Y. and Kim, J., 2017. Bundling and joint marketing by rival firms. Journal of Economics & Management Strategy, 26(3), pp.571-589.
Ridyard, D., 2017. Exclusionary pricing and price discrimination abuses under Article 82—an economic analysis. In Dominance and Monopolization (pp. 315-332). Routledge.
Shiller, B. and Waldfogel, J., 2011. Music for a song: an empirical look at uniform pricing and its alternatives. The Journal of Industrial Economics, 59(4), pp.630-660.
Simshauser, P. and Whish-Wilson, P., 2017. Price discrimination in Australia’s retail electricity markets: An analysis of Victoria & Southeast Queensland. Energy Economics, 62, pp.92-103.
