In the examples in Table 12.1, if the movie theater does not...

In the examples in Table $12.1,$ if the movie theater does not price discriminate, it charges either the highest price the college students are willing to pay or the one that the senior citizens are willing to pay. Why doesn't it charge an intermediate price? (Hint: Discuss how the demand curves of these two groups are unusual.)

Key Concepts

Consumer Willingness to Pay

Consumer willingness to pay is critical in pricing decisions because it determines how much a consumer values a product. In markets with clearly segmented groups, the highest willingness to pay from one group and the lower willingness of the other create a scenario where pricing at an intermediate level leads to suboptimal outcomes. The firm must choose an extreme price that captures the full surplus from one group rather than a middle-ground price that leaves revenue on the table.

Price Discrimination

Price discrimination involves charging different prices to different groups based on their willingness to pay. When firms can segment the market, they can extract more consumer surplus by tailoring prices. In situations where differentiation is not allowed, the firm must choose a single price that maximizes overall revenue given the heterogeneous willingness to pay of its customers.

Demand Curve Discontinuities

The demand curves for the two groups in this context are unusual because instead of being smooth and continuous, they are characterized by distinct jumps or discontinuities at each group's maximum willingness to pay. This discontinuity means that an intermediate price does not simply split the market; rather, it either excludes one group entirely or fails to extract maximum revenue from the group with a higher willingness to pay.

Please give Ace some feedback