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Published by Arina Farihan Azhar

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Published by: Arina Farihan Azhar on Dec 08, 2011
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CHAPTER 9: Price Discrimination
This chapter considers nonlinear pricing and price discrimination.Price Discrimination: Nonuniform pricing in which a firm 1.charges different categories of consumers different unit(uniform) prices for the identical good, or2.charges each consumer a nonuniform price on different units of the goodPrice difference due to different cost is not price discrimination.
1.
Which differences in price is due to price discrimination?
Price of gasoline in Onalaska
Price of gasoline near downtown La Crosse
Price of gasoline in La Crescent
Price of gasoline in Minneapolis2. Is a quantity discount for large purchases price discrimination?
 
Purpose :Practice of setting different prices for the same good so as to captureas much Consumer Surplus (CS) as possible.Incentive:Maximize profits.Conditions for Price Discrimination:1.Market power2.Identifying different willingness-to-pay
For individuals
For groups of individuals3.Prevent or limit resales (no arbitrage)Cost Test for Price Discrimination:Price discrimination exists if the ratio of prices across markets isdifferent from the ratio of marginal costs. (In perfectly competitivemarket the law of one price holds)When is Price Discrimination a Problem?When used to lessen competition
Predatory pricing impacting direct competitors (
 primary-line price discrimination
)
 
Types of Price DiscriminationPerfect Price Discrimination or 1
st
Degree Price Discrimination:Also called personalized pricing. Set different prices (at maximumwillingness-to –pay) for each buyer and for each unit sold, extractingall the CS.Examples: small town doctor, auto salesCase 1: Each consumer buys one unit.Charge the maximum willingness-to-pay for each consumer andcapture all the CS. The price to the marginal consumer = MC andoutput sold is identical to perfect competition. No efficiency loss, butincome distribution is impacted.Case 2: Each consumer buys more than one unit.1.Quantity dependent prices that extracts all the CS
2.
Two-part tariff : Lump-sum fee for right to purchase productequal to CS and price equal to MC

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