01/11/2022

Prof Rajkishan S S
IILM
PRICE DISCRIMINATION
1 Learning outcome: understanding pricing strategies
as means of capturing consumer surplus and
transferring it to the producer
Dominick Salvatore pages 436-444
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WHAT IS PRICE DISCRIMINATION?
(PD)

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 PD refers to the charging of different prices for
different quantities of a product, @ diff. times. to diff.
customer groups or in diff. markets , when these prices

Prof Rajkishan S S
are not justified by cost differences.

 Example: Telecom companies charge: 1) a given price per

call till a given no. of calls & a lower price for addl. batches
of calls….

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 2) charge higher prices for business hrs. than during
nights and holidays..
 3) charge higher price to businesses than to HHs.

 INCENTIVE: firm can increase its TR and profits for a 6

given level of sales and total costs through PD
SOME OTHER EXAMPLES

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1) Power cos.- higher prices to commercial
than to residential users

Prof Rajkishan S S
2) Medical and legal practioners charge lower
fees to low-income than to high-income
people.
3) Movies and theatres charging lower prices
for afternoon than for evening shows.

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4) Service industries charging lower prices for
children and the elderly for haircuts, public
transportation, and airline tickets.
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CONDITIONS NECESSARY FOR PD

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 1. Firm has some market power-imperfect
competitor

Prof Rajkishan S S
 2.price elasticity of demand for the product
must be diff. for diff. quantities of the
product, @ diff times, for diff. customer
groups, or in diff. markets.
 3. Firms must be able to segment the

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market- ie., the quantities of the product or
service, the times when they are consumed,
and the customer groups or markets for the
product must be seperable….
 see page 437, I para, Salvatore… 8
FIRST DEGREE PD

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 Firm charging the customer his or her Reservation Price…
is I – degree PD
 [Reservation price-the maxi. Price the customer is willing to

Prof Rajkishan S S
pay for each unit of the product bought.]

 Examples of I-Degree PD:

 One –on –one Haggling( bargaining)

 Car Sales man

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 Means –based financial aid

 A chartered accountant who has just completed a client’ s

tax returns can correctly estimate the client’s WTP.
 Firm Extracts all the consumer surplus from the consumer.

 Challenges: identifying the consumer’s WTP and

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preventing Arbitrage
II DEGREE PD

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 Charging different prices per unit for diff.
quantities to the same consumer for the same
good or service…

Prof Rajkishan S S
 Examples:

 Bulk discounts.
 Season tickets.
 Buy one, get one half off.

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 Block pricing by electricity cos.natural gas
utilities, and municipal water cos.

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 Often found in pricing of public utilities..
III DEGREE PD

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 Dividing consumers into two or more groups with separate
demand curves and charging different prices to each
group….

Prof Rajkishan S S
 charging of different prices for the same product in diff.
markets until the MR of the last unit of the product sold
in each market equals the MC of producing the product.
 Examples- see page 440….

 Eg.;Electricity pricing-BSES IN INDIA-CASE STUDY

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11-2, PP 441, SALVATORE
 AIRLANE FARES- EXAMPLE 10.2, PP 344, PINDYCK..

 In all cases, higher price is charged in the market with

less elastic DD.. And lower price in the market with high
elastic DD… 11
FURHER TOPICS

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 Dumping-International PRICE dISCRIMINATION
( persisitent Dumping)
 -lower price abroad than @ home for the same

Prof Rajkishan S S
commodity because of a high elasticity of demand
for the same commodity in the foreign market.
 India –China—China accused of dumping electronic
items, television sets, computers & toys and silk
in India

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 Industrial nations-dump agricultural commoditiesin
developing countries…

 Predatory dumping
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 Sporadic dumping ….page 443-445 Salvatore…