Capturing Consumer Surplus

In our Managerial Economics class, we were discussing methods of capturing consumer surplus. Our models of demand (and supply) are starting to get more complicated than "two straight lines, one going up and one going down". We are beginning to build strategies which allow firms to capture more profit in the form of consumer surplus.

One ingenious method describes the idea of cover charges and ticket entry fees as generalized by two part pricing schemes. It essentially boils down to this idea: Charge a per quantity price (marginal revenue) at the marginal cost. However, in order to capture consumer surplus, the second component of price is determined as a fixed entry fee (cover charge) which encompasses all of consumer surplus. This idea is particularly clever because it ensures that the quantity sold is identical to the profit maximizing quantity.

Another clever idea is the concept of product differentiation (common as an undergrad economics concept), which allows a profit maximizing firm to distinguish and segment their market based on "invisible" characteristics of customers based on their purchasing preferences. However, this segmentation allows you to break up a market and more effectively capture more consumer surplus by treating each market segment differently. The more you can accurately segment the market based on pricing preferences (elasticities) the more you can capture consumer surplus. One of the interesting components of this strategy is the fact that consumer characteristics can be "invisible" or as our prof described "self selected" in that consumer preferences are revealed through their purchasing habits rather than some visible characteristic. However, in a monopoly where the company can segment the market perfectly (charging each individual exactly their full marginal revenue) a firm could technically assume all of the consumer surplus.