Price Discrimination

♦ Single-price monopolist: a monopoly that charges every customer the same price for the same
product
♦ Price Discrimination: charging different buyers different prices for the same product.

Have your cake and eat it too:

 With single-price monopoly, we often need to ignore low (but positive) profit customers to
maximize the benefit from our high-profit customers.
 With price discimination, we can maximize the benefit from high-profit customers and still get
additional benefit from low-profit customers.

Difficult to implement

 Can’t just ask customers to self-identify.

 Instead, look for behavior correlated with group:
o Airlines look for certain behaviors to differentiate between business and student
travellers:
 Weekend travel
 Booking in advance
 Difficult, but benefits the producer
Perfect Competition vs Monopoly:
Single-Price vs Price discrimination:

1. Q* Higher with discrimination

2. Lowest P* lower with discrimination
3. Producer Surplus (PS) larger with discrimination
4. CS smaller with discrimination
5. DWL smaller with discrimination
6. Discrimination is less inefficient
Perfect competition vs perfect price discrimination:

From an efficiency perspective, these two are identical.

How to Price Discriminate:

 Sort customers by Elasticity of Demand (ED)

 Give high ED customers a low price
 Give low ED customers a high price

Examples of real-world price discrimination:

 “Advance purchase restrictions.”

 Price sensitive customers will look for these products at better deals
 Volume discounts.
 Buying in bulk
 “Two-part tariffs.”
 Memberships at sam’s club, costco, etc.
 Senior discounts.
 Fixed income
 Plenty of time
  Student discounts
 Fixed income
 Plenty of time
 Frequent shopper discounts.
 Sales.
 Coupons.
 Factory Outlets.
 Usually in the middle of nowhere

Why customers might LIKE it

 If the group that benefits is “deserving.”

 With economies of scale, discrimination can lower costs enough to make ALL prices
lower than under single-price monopoly.