healthy for all (consumers & producers

)

Faculty-Steven Phillip Warner

Faculty- Steven Phillip Warner
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Content
 Price discrimination.  Requirement & conditions.  Examples.  Types of Price discrimination & its benefits.
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Price Discrimination
 It occurs when more than one price is charged for a product, for specific purpose.  Purpose: Increases firm’s profit and also increases the social welfare.  Impact:  Three Types: First degree, Second degree & Third degree.
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Requirements & Conditions
 Firms must have some monopoly power.  Different classes of customers, with different elasticities of demand must exist.  Resale of product is not permitted.  Firms must have knowledge of consumer’s willingness to pay.
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Equilibrium condition in Monopoly
• MR = MC Price Pmax Max profit P* P** MC • Price charged from corresponding AR curve.

AR=DD MR Q* Q** Qty

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Industries practicing Price discrimination
 Retail Industry  Travel Industry  Telecom Industry  Automobile Industry  Pharmaceutical companies  Professionals  Progressive Taxation  Academic Institutions  Discounts  In daily lives.
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TYPES OF PRICE DISCRIMINATION & ITS BENEFITS

Faculty-Steven Phillip Warner

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First degree price discrimination
 Also called Perfect Price Discrimination.  Each consumer pays the maximum that he is willing to pay.  The seller exploits the reservation price of each customer.  Consumer Surplus is “0”.
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First degree Price discrimination
Different prices charged for each unit of the qty demanded.
Ma xp ro

Price Pmax
P1 P2 P3

fit

MC

MR curve no longer exists

P4 P**

AR

*

Q**
Faculty-Steven Phillip Warner

Qty

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Second degree price discrimination
 Also called Quantity Discounts.  Price charged according to quantity demanded.  Initial units are more expensive.  More common than 1st degree Price Discrimination.  As price decreases consumer surplus increases.
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Second degree Price discrimination
Price

P1 P2 P* P** AR MC

MR

Q1

Q2

Faculty-Steven Phillip Warner

Q*

Q**

Qty

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Third degree price discrimination
 Also called Market Segmentation.  Market segments must have different elasticities of dd.  Price depends on the elasticity of dd.  In each market MR=MC.  Most common price discrimination.  Reduces consumer surplus.
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Third degree Price discrimination
• Q = Q1 + Q2 • MR = MR1 + MR2; MR1 = MR2 = MC • e1 < e2, so, P1 > P2 Price Mkt1 Price Mkt2 Price Aggregate MC

p1

P2
AR2 MR2 MR1 AR1

MR Q Qty

Q1

Qty

Q2

Qty

Faculty-Steven Phillip Warner

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Dumping
When a monopoly charges higher price in domestic market • & lower price in foreign market.
Aggregate Price MC

Price

Domestic

Price

Foreign MC

p1

P2
AR1

MR2

MR

MR1

Q1

Qty

Q2

Qty

Q

Qty

Q = Q1 + Q2 Faculty-Steven Phillip Warner

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Intertemporal price discrimination
 Divides consumers into 2 groups, on the basis of their incomes.  The 1st group of consumers have to pay a higher price for the product, but the price is reduced later, to appeal to the mass market.
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Intertemporal Price discrimination
Price

*= inelastic curve of small group. ** = elastic curve of large group.

P*

P** AC=MC AR** MR** MR* Q* AR* Q** Qty

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Peak load pricing
 It redistributes usage from peak periods to off peak periods.  Allow firms to produce the same quantity of goods at a lower capital cost.  Objective is to increase economic efficiency rather than increase consumer surplus. Faculty-Steven Phillip Warner

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Peak load pricing
Price

* = off peak hrs
P** MC

** = peak hrs

P* AR** MR** AR* MR* Q*
Faculty-Steven Phillip Warner

Q**

Output 18

Wal-mart
 Largest retail chain.  Lowest prices charged.  Net sales: $97.6 billion.  Net income: $3.033 billion.
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Air-line
 Different versions of an air ticket.  Frequent flyer’s program.  Firms enter into a contract with an airline, where the firms’ employees receives discount on each airline ticket.  Discount to large scale consumer.
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Pharmaceuticals
 Practice geographic Price discrimination.  Pricing on the basis of the ability of people.  Price difference between countries, often reinforced by national drugs laws & regulations.
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 Telecom & electricity industry: as per the time or day of the week the rates change.  Automobile industry: high price for new model; gradually price decreases.  Taxation: tax rate changes as income increases.  Professionals: charges different prices from different customer.  In our daily life
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Why Price discrimination is beneficial
 Efficient prices.  Open markets.  Possibility of Pareto improvement.  Intensify competition in the market.  Leads to socially beneficial innovation.  A “win-win” situation.
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Presented by------• • • • • Denny Mathew Dipannita Chakraborty Koushik Sur Souvik Soo Totan Mia

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Thank You!!!

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