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IDE 9r

IDE 9r

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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 DiscriminationThis 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 capture as much Consumer Surplus (CS) aspossible.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 is different from the ratio of marginalcosts. (In perfectly competitive market 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 maximum willingness-to –pay) for each buyerand for each unit sold, extracting all the CS.Examples: small town doctor, auto salesCase 1: Each consumer buys one unit.Charge the maximum willingness-to-pay for each consumer and capture all the CS. The price to themarginal consumer = MC and output 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 product equal to CS and price equal to MC3
rd
Degree Price Discrimination [group pricing]:Seller separates consumers into two or more groups by distinguishing different buyer characteristics(demand elasticities must differ). The market is segmented with different prices charged to differentgroups.Examples: Senior discount, student discount, geographical locationNote:MR = P [ 1 + (1/ε
D
)]In each market segment, i, profit maximizing firm wants MR 
i
= MCSo, MC = P
1
[ 1 + (1/ε
D1
)] = P
2
[ 1 + (1/ε
D2
)]orP
1
/ P
2
=[ 1 + (1/ε
D2
)] / [ 1 + (1/ε
D1
)]Charge lower price in those market segments with greater price elasticity.
 
Segmenting the market may be difficult:
Student or senior discount
Airline travel (tourist discount)
Discount coupons or rebates
Queuing or waiting
Informed versus uninformed2
nd
Degree Price Discrimination [menu pricing or nonlinear pricing]:(see Chapter 10 under Nonlinear Pricing)Two cases:1.Consumers self-select from a menu since the seller can only distinguish buyers indirectly.Examples include airline price discrimination (get lower fare if selecting a Saturday night stayover) or quantity discounts (get lower prices if selecting higher quantities).
2.
Two-Part Tariff charges a customer a lump-sum fee for the right to purchase and a usage chargeper unit. Ideally, the firm would like the usage charge or price to be MC (if MC is constant) andthe lump-sum fee to be Consumer Surplus (CS). The average price will vary (hence nonlinear).In special cases the two-part tariff can extract all the CS.Examples: Club memberships (e.g. golf club), car leasing, Polaroid’s instant-picture camera

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