Price Discrimination (3)
Who can price discriminate?
Price searchers (monopolies and oligopolies- different from a single-price monopoly)
Conditions for price discrimination....
1) Firm has to have market power (only monopolies and oligopolies) 2) Firm must be able to identify differences in willingness to pay b/w consumers 3) Firm must be able to limit resale of product
Types of Price Discrimination
1) Perfect Price Discrimination 2) Quantity Discrimination 3) Multi-Marketing Price Discrimination 4) Two-Part Tariff
Multi-Market Price Discrimination- how to identify which group an individual belongs to....
1) observable characteristics (age, location country, ex: students or seniors discounts) 2) get consumers to "self select" themselves into different groups (who uses coupons, or whether someone behaves elastically or inelastically they behave- business or vacation)
Perfect Price Discrimination Results in...
A totally efficient outcome. Net benefits to society are maximized, but all these benefits go to the producer. No deadweight loss. Same quantity produced as with perfect competition. Essentially turns the graph into a perfect competition graph. Efficient, but not equitable, and not really achievable.
Multi-Market Price Discrimination
Charge different groups different prices -> most common Essentially act as a single-price monopoly within each group Won't know individual willingness to pay but have an idea of group willingness.
What is price discrimination?
Charging different prices to different customers for the same good
What is the key element to price discrimination?
ELASTICITY it's profit maximizing to charge higher price to inelastic consumers because they'll still buy it, and a lower price to elastic consumers because they won't buy it at higher costs
Quantity Discrimination
Firm charges a different price for large quantities than for small quantities. All customers who buy a given quantity pay the same price. Takes advantage of downward sloping demand curve (consumers willing to pay lower prices for successive units) Ex: Buy 1 get 1 half off.
Perfect Price Discrimination
Firm charges each consumer exactly what they are willing to pay Price=Marginal Value Marginal Revenue Curve becomes Demand Curve Continue to sell as long as price exceeds marginal cost Stop producing where MR=MC ALL PRODUCER SURPLUS
Two-Part Tariff Maximum Lump-Sum Fee
The area of consumer surplus above the per unit price
Two-Part Tariff
the firm charges first a lump-sum fee for the right to buy as many units as they want and then charges for those units at a per-unit price (ex: Costco! Personal Seat Licenses!)
Why do firms price discriminate?
to increase profits!! price discrimination is profitable because consumers have different willingness to pay for goods, price discrimination allows firms to charge higher prices to consumers who are willing to pay that price