scope 1 monopoly pricing - hkep · new horizon economics school-based assessment resources package...

Scope 1 Monopoly Pricing

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New Horizon Economics

Assignment: News Commentary

— ‘HongKongDisneyland’simplementationofprice

discrimination is beneficial to society? ?’

Monopoly Pricing

Scope 1：

New Horizon Economics School-based Assessment Resources Package (Elective)

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Assignment: News commentary

Hong Kong Disneyland’s implementation of price discrimination is beneficial to society?

In reality, many firms will provide price reduction, special offers, etc., to attract customers. The following mind map can help you think about how to choose a suitable topic lives on ‘monopoly pricing’. Complete the mind map below and provide other examples.

Simple monopoly pricing

Price discrimination

Definition:

Example:

Definition: The seller charges along the demand curves of different consumers in order to extract the consumer surplus from each consumer completely.

Partial example: Dutch auction

Definition:

Example:

First degree

Third degree

Second degreeMonopoly

pricing

Definition:

Example:

Step Setting a topic1Step Setting a topic1


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The following report is about Hong Kong Disneyland’s attendance. Read carefully and answer the questions.

Disneyland’s Annual Pass holders increases A spokesman from Hong Kong Disneyland said that the sale of its Annual Passes launched since the end of 2006 has reached 130,000 sets, which is 120,000 sets more than that at the end of July this year, showing that the effect of the financial tsunami on Disneyland is small. Its Managing Director Andrew Kam said there is no plan to lower the price at the moment.

Yet, Disneyland’s attendance is unsatisfactory since it was open in September 2005. A paper from the Legislative Council shows that in the three financial years 2005/06 to 2007/08, Disneyland had only received 14.5 million visitors. Except the first year, the figures of the other two years were below 5 million. The paper also points out that in 2007/08, visitors were mainly local people due to an increase in Annual Pass holders, and Disneyland had added new attractions that targeted at local youth.

Disneyland currently offers Annual Passes for adults from $650, while students can enjoy concessionary rates from $460.

Disneylandhasnoplantolowerthepriceatthemoment.

A01 Local News DAILY NEWS 11 December 2008

From the mind map on the previous page and the news report above, what issue do you think is derived from Hong Kong Disneyland’s charging visitors of different age groups for different prices?

From various examples of monopoly pricing in society, students can examine the effects to the buyers, sellers and society as a whole. Now, use the topic ‘Hong Kong Disneyland’s implementation of price discrimination is beneficial to society?’ and write a news commentary. List the tools, economic concepts and theories involved.

Topic Tools, concepts and theories


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•

•


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What do you think should be included when collecting information related to the above topic? List two of them.

1.

2.

Where do you think you can collect the above data? List two of them.

1.

2.

What are the effects brought by Hong Kong Disneyland’s implementation of price discrimination? According to the data collected, give a preliminary analysis by completing the following mind map:

Visitors

Disneyland

Students pay less. Their consumer surplus increases.

Society

If consumer surplus generally increases, social surplus will increase.

Effects of Hong Kong Disneyland's implementation of price discrimination

Step Data collection and analysis2Step Data collection and analysis2List the main contents in the introduction, analysis and conclusion of the news commentary.

Introduction

Analysis

Conclusion

Step Drafting an outline3Step Drafting an outline3

Based on the data collected in the above steps, write a news commentary on the topic.


I ntroduction

Step Writing a news commentary4Step Writing a news commentary4


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List the main contents in the introduction, analysis and conclusion of the news commentary.

Introduction

Analysis

Conclusion


Based on the data collected in the above steps, write a news commentary on the topic.


I ntroduction



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A nalysis


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C onclusion

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School-based Assessment Guide


I. Background informationStudents should be familiar with the following knowledge and concepts before they start working on the news commentary:

Knowledge required Concept required

• Features of different types of price elasticity of demand (4B: Ch.10)

• Relationship between price elasticity of demand and total revenue (4B: Ch.10)

• Differences between price discrimination and simple monopoly pricing (Elective Part 1: Ch.2)

• Price elasticity of demand (4B: Ch.10)

• Price discrimination (Elective Part 1: Ch.2)

• Simple monopoly pricing (Elective Part 1: Ch.2)

II. Suggested teaching procedure

1.Teachersmaygothroughsomeimportanteconomicknowledgewithstudentswhentheyaredoingstep1, suchas the relationshipbetweendifferent typesofpriceelasticityofdemandand totalrevenue.Then,askstudentstothinkabouthowtoapplytheireconomicknowledgetoanalyzethereasonswhyHongKongDisneylandimplementspricediscrimination.

3.Ask students topayattention to thecoreandbranchesof themindmap.Then, refer to theframeworkandlisttheeffectsofHongKongDisneyland’simplementationofpricediscriminationonitself,visitorsandsociety.

4.Askstudents toorganize thedata instep3,and list themainpoints in introduction,analysisandconclusion.

2.Whenstudentsaredoingstep2,teachersmayremindthemtocollectdataonthepricesofHongKongDisneyland’sAnnualPassesandotherdiscountsofferedfromitsofficialwebsite.Besides,theyshouldalsobeawareofrecentreportsaboutHongKongDisneyland.

5.Whendoingstep4,guidestudentstousetheeconomicknowledgealongwiththepreliminaryanalysisinstep2.Theyshouldstatetheirpointsandimplicationssystemically,andmakeinformedjudgements.

III. Suggested answer



Definition: The firm sets only one price for each unit of its output; at this price, consumers can buy as much as they want.

Example: All goods that are charged at one price only.



Definition: The seller charges buyers higher prices for quantities with greater marginal benefits and lower prices for quantities with smaller marginal benefits.

Example: Quantity discounts, two-part tariffs

First degree

Third degree


pricing

Definition: The seller separates customers with different price elasticity of demand (or information costs) into two or more groups and charges them different prices.

Example: Discounts for students and the elderly

The topic derived from the news report: Hong Kong Disneyland’s implementation of price discrimination is beneficial

to society?


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III. Suggested answer



Definition: The firm sets only one price for each unit of its output; at this price, consumers can buy as much as they want.

Example: All goods that are charged at one price only.



Definition: The seller charges buyers higher prices for quantities with greater marginal benefits and lower prices for quantities with smaller marginal benefits.

Example: Quantity discounts, two-part tariffs

First degree

Third degree


pricing

Definition: The seller separates customers with different price elasticity of demand (or information costs) into two or more groups and charges them different prices.

Example: Discounts for students and the elderly

The topic derived from the news report: Hong Kong Disneyland’s implementation of price discrimination is beneficial

to society?


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Write a news commentary on the following topic, and list the tools, economic concepts and theories involved.

Topic Tools, concepts and theories


• Demand-supply theory

• Consumer surplus and producer surplus

• Price discrimination and simple monopoly pricing

What do you think should be included when collecting information related to the above topic? List two of them.

1. The prices and items included in Hong Kong Disneyland’s Annual Passes

Types and prices of Hong Kong Disneyland’s Annual Passes:

Type Value Deluxe Premium

Admission valid days230 days

(Most weekdays)

340 days

(Most weekdays & weekends)

365 days

(Every day)

Adult $650 $1,300 $1,800

Student (12-25 years

old full time student)$460 $930 $1,250

2. The reasons why Hong Kong Disneyland charges visitors of different age groups for different prices

Where do you think you can collect the above data? List two of them.

1. Hong Kong Disneyland’s official website (http://park.hongkongdisneyland.com/)

2. News reports on Hong Kong Disneyland

Step Data collection and analysis2Step Data collection and analysis2


Visitors

Disneyland


Society



If consumer surplus generally decreases, social surplus will decrease.

Attendance figures increase.

Income and profit increase.

Adults pay more. Their consumer surplus increases.


Introduction

Briefly introduce the prices and items included in Hong Kong Disneyland’s Annual Passes.

State that the main point of discussion is to find out whether price discrimination is beneficial to society.

Analysis

Analyze the motives and advantages of implementing price discrimination.

Analyze the effects of price discrimination on buyers and sellers.

Deduce the effects of price discrimination on social surplus.


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Visitors

Disneyland


Society



If consumer surplus generally decreases, social surplus will decrease.

Attendance figures increase.

Income and profit increase.

Adults pay more. Their consumer surplus increases.


Introduction

Briefly introduce the prices and items included in Hong Kong Disneyland’s Annual Passes.

State that the main point of discussion is to find out whether price discrimination is beneficial to society.

Analysis

Analyze the motives and advantages of implementing price discrimination.

Analyze the effects of price discrimination on buyers and sellers.

Deduce the effects of price discrimination on social surplus.


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Conclusion

Restate that Hong Kong Disneyland’s implementation of price discrimination may be beneficial to society.

Conclude the effects brought by price discrimination.

Sta te the area and m a i n p o i n t s o f discussion.


I ntroduction

Hong Kong Disneyland was open in September 2005, bringing much fun to

local and overseas visitors. The Annual Passes it offers starting from 2006 allow

holders to visit the park for infinite times on specified dates, and enjoy discounts

on hotel accommodation and shopping. Below shows the types and prices

of the Annual Passes for adults and students:

Type Value Deluxe Premium

Admission valid days230 days

(Most weekdays)

340 days (Most weekdays

& weekends)

365 days (Every day)

Adult $650 $1,300 $1,800

Student (12-25 years old full time student)

$460 $930 $1,250

Source:HongKongDisneyland,2008.Downloadedfromhttp://park.hongkongdisneyland.com/.

This news commentary will examine the motives and advantages of

Hong Kong Disneyland’s implementation of price discrimination,

the effects on buyers and the seller, and find out whether price discrimination

is beneficial to society.

A nalysis

Since the services and costs that Hong Kong Disneyland provides to students

and adults are essentially the same, while students can enjoy concessionary

rates, it is price discrimination.


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F i r s t po in t ou t tha t Hong Kong Disneyland i m p l e m e n t s p r i c e discrimination, and list the required conditions.

Wi th the a id o f the d e m a n d - s u p p l y theory and diagrams, explain the reasons why charging students and adults (who have different price elasticity of demand) for different pr ices can increase total revenue.

The following shows the required conditions:

Condition 1: Hong Kong Disneyland is a price searcher with monopoly power.

Condition 2: Compared with students, adults have a lower price elasticity of

demand and are more willing to pay the price.

Condition 3: The cost of Hong Kong Disneyland involved in preventing adults

from using students’ Annual Passes is negligible.

Price discrimination is beneficial to the seller (Hong Kong Disneyland)

Students’ market Adults’ market

Fig1:Studentshaveahigherpriceelasticityofdemand.Loweringthepricewillincreasethetotalrevenue.

Fig2:Adultshavealowerpriceelasticityofdemand.Raisingthepricewillincreasethetotalrevenue.

As shown in Fig 1, the price elasticity of demand of students is greater than 1.

Hong Kong Disneyland’s gain in total revenue due to an increased number of

students’ visits is greater than the loss due to a fall in price, that is, the total

revenue will increase. Fig 2 shows that the price elasticity of demand of adults is

smaller than 1. The gain in total revenue due to a rise in price is greater than the

loss due to a fall in the number of adults’ visits, that is, the total revenue will

increase.

Compared with simple monopoly pricing (that is, only one price is set for a

product), Hong Kong Disneyland lowers the price for students with a higher

price elasticity of demand, and raises the price for adults with a lower price

elasticity of demand may increase its total revenue. Since service provision

mainly involves fixed cost (such as the construction cost of the facilities), an

increase in total revenue will increase the profit.

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Hong Kong Disneyland is a private profit-making institution. Under the postulate

of profit maximization, its long-time implementation of price discrimination

implies that the profit under such pricing arrangement is higher than that

under simple monopoly pricing.

Price discrimination is beneficial to the buyers (students)

Compared with simple monopoly pricing, under price discrimination, a lower

price not only increases students’ consumer surplus, but also increases their

quantity demanded. More students are able to visit Hong Kong Disneyland. Yet,

a higher price will reduce adults’ consumer surplus and number of visits.

Is price discrimination beneficial to society?

After Hong Kong Disneyland has implemented price discrimination, since the

change in consumer surplus is uncertain, total social surplus may not increase

according to the following formula:

Total social surplus = Consumer surplus + Producer surplus

However, compared with simple monopoly pricing, under price discrimination,

the number of students’ visits increases but the number of adults’ visits

decreases. Since the price elasticity of demand of students is higher than that of

adults, the increase in the number of students’ visits will probably be more than

the decrease in adults’ visits, which increases the overall number of visits.

An increase in the total number of visits means an increase in consumer

surplus, which implies an increase in total social surplus.

C onclusion

Hong Kong Disneyland charges higher prices on adults who have a

higher willingness and ability to pay, and provides students with concessionary

rates may increase its total revenue. If the implementation of price discrimination

enables more people to enjoy the facilities of Disneyland, it may be beneficial

to society. In addition, allowing sellers to select pricing arrangement freely

may also be beneficial to society.

Compare the changes i n t h e c o n s u m e r surplus of s tudents and adults under price discrimination.

Explain the reasons why price discrimination may be beneficial to society.

State your points and opinion.

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IV. School-based Assessment Form

News commentaryTopic: Hong Kong Disneyland’s implementation of price discrimination is beneficial to society?School’s name :

Student’s name : Class :

Date :

Assess the student’s performance based on the following criteria and give comments.

Assessment dimensions

CriteriaMarks

Comments5 4 3 2 1 0

Introduction

Able to state the main points and area of discussion

Suitable length and able to stimulate readers’interest

Analysis

Integrate news reports and make analysis

Able to use relevant economic theories and models for analysis

Able to make objective analysis and reasonable deductions

Clear arguments with proof and evidence

Correct use of grammar and no wrong spelling

Able to lead readers to develop deep reflections

Conclusion

Able to summarize the whole essay and respond to the initial question

Able to show one’s own opinion

Overall comments: Total marks:

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