Microeconomics

Pricing
Policies
 Introduction
• Under certain conditions firms can raise
profits through price discrimination
• Price discrimination: when a firm charges
different prices for different units of the same
good
• In order to price discriminate a firm must have
some market power
• Each of these has consequences for consumer
and aggregate welfare.

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 Price Discrimination
• A monopolist can engage in perfect price
discrimination
– if a customer’s willingness to pay for each unit is
known
– and if the monopolist can charge a different price for
each unit
• If consumers’ willingness to pay is unknown (in
most cases it is not), firms often still can
discriminate based on observable
characteristics.
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Perfect Price Discrimination

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 Perfect Price discrimination
with Two-Part Tariffs
• Two-part tariff: consumers
pay a fixed fee if they buy
anything at all, plus a
separate per-unit price for
each unit they buy
• With a per-unit price of
$1.50, the demand will be
3 units. This leaves a
consumer surplus of $2.25,
so Emily would be willing
to pay a weekly fee of
$2.25, and no more.

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 Profit with a Two-Part Tariff and
Identical Consumers
By lowering its per-
minute charge from
20 to 10 cents, equal
to its marginal cost,
and raising its fixed
fee, the firm can
increase its profit to
the maximum
possible.

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 Observable Customer Characteristics
Discrimination based on observable customer
characteristics: when a firm can distinguish, even if
imperfectly, consumers with a high versus low
willingness to pay.

Examples:
• Female vs male costs for haircuts
• Lower prices for children, students, retirees…
• Higher prices for tourists.

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Profit-Maximizing Prices to Two
Groups of Consumers

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Profit-Maximizing Price
without Discrimination

Profit = $4,900

Profit = $5,000

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