If we have or can develop two mar- 

 kets, A and B, which by definition have 

 different demand functions and thus dif- 

 ferent average revenue schedules in each 

 market, we can easily see how a single 

 firm or group that produces a single 

 product can manipulate or administer 

 these prices by allocating the product 

 in different markets. 



The classic example is in dairying. 

 The dairy industry has two sets of 

 prices: one for fresh milk and one for 

 manufactured milk. We also practice dis- 

 crimination in the international market, 

 where we have one set of export prices 

 and another set of domestic prices. The 

 criteria for administering prices is 

 that we must separate the two markets to 

 prevent arbitrage or prevent any unau- 

 thorized exchange between the two mar- 

 kets. If we have a single demand and a 

 single quantity of product, say 24 blue 

 tutus, we would sell all 24 in market A 

 for P m or $16 for a total revenue of 

 $384 , a simple one-price market system 

 for a supply of 24 tutus. 



If we discover that red tutus can 

 be sold in another market at no addi- 

 tional cost, we can allocate the total 

 tutu supply, Q m , between markets A and B 

 on the economic principle of equating 

 the marginal revenues in the two markets 

 at Q a and Qt, respectively, where the 

 marginal revenues for blue tutus, MR 

 and red tutus MR^ are equal. Now the 

 prevailing market prices are P a ($27) 

 for blue tutus and P b ($22) for red 

 tutus. This differentiation of the tutu 

 market into blues and reds now yields 

 total revenue for 24 tutus of $598 ($378 

 for blue tutus and $220 for red tutus) - 

 a significantly larger revenue by defin- 

 ing the two markets than could be ob- 

 tained in the single market. This is 

 one way to manipulate prices. We do this 

 every day and this is why, in adminis- 

 tered pricing systems, we get pricing 

 and allocation of resources which are 

 less efficient in terms of the competi- 

 tive model . 



We frequently manipulate prices for 

 public utilities where the units of pro- 

 duct consumed must be used sequentially. 

 In this case, we start out with a series 

 of declining block pricing schedules for 

 electrical energy, a product in which 

 the consumer must buy the first unit 

 before he can have a second unit. 



Therefore, the firm or industry can con- 

 trol the price charged for successive 

 units. In this situation, the control- 

 ler of the resource or product gains 

 most of the value under the demand curve 

 by block rate pricing. This is the 

 pricing system that exists in most pub- 

 lic utilities, such as communications, 

 water systems, power systems, and 

 others. 



These administered prices have 

 little in common with a competitive 

 pricing system, which is the standard 

 against which we measure the economic 

 performance of an industry or a firm. I 

 hope this gives you some idea of how 

 some economists earn their living and 

 how prices, regardless of how they are 

 determined, serve to allocate resources 

 rather efficiently within whatever con- 

 straints are imposed by private or gov- 

 ernment manipulation. 



Let me briefly touch on another 

 matter which affects prices and values, 

 with respect to the three basic types of 

 goods that we deal with and how the 

 character of the goods affects price. 

 There are economic goods, free goods, 

 and public goods. 



An economic good is anything that 

 has value in use or that is scarce, 

 i.e., anything for which we are willing 

 to pay. Anything with a price is an eco- 

 nomic good. Free goods are those that 

 are abundant, there is more than enough 

 to go around, and therefore there is no 

 price. You can always tell a free good 

 because it has a zero price. We have 

 this third category which really gives 

 us problems. That is the public goods 

 which society values, but has no effec- 

 tive way of pricing to its individual 

 members. 



Public goods fall into the area of 

 things that we intuitively hold to be 

 good or valuable, but which we are un- 

 willing, as individuals, to pay for. It 

 is the normative concept. Because of 

 the nature of these goods or services 

 which cannot be individually owned or 

 controlled, we as individuals are not 

 willing to pay for them. The result is 

 a situation in which you have the free 

 rider problem, where people can enjoy 

 certain goods or services without having 

 to pay. There is a terrific enforcement 

 problem, such that beneficiaries of 

 these economic activities cannot be 



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