8 - Price Differentiation (Self-Study) Flashcards
What is the main idea of price discrimination?
And what is the challenge with it?
- charging different prices to different customers (for similar goods), according to where these customers are along the demand curve
- challenge: identifying the different customers and getting them to pay these different prices
What are the broad forms of price discrimination?
1.
2.
3.
- first degree discrimination
- second degree discrimination
- third degree discrimination
What is the reservation price?
maximum price a customer is willing to pay for a good
What is the first degree price discrimination?
practice of charging each customer her reservation price (maximum price)
First degree price discrimination | where would we set the single price and where the lowest price?
- single: intersection of MR and MC curve
- lowest: MC and D curve
What is the second degree price discrimination?
What would be an example?
- practice of charging consumers different prices for different quantities
- e.g. lower prices for higher amounts - 1pcs of pizza for 1 dollar, 5pcs of pizza for 3 dollar
Second degree price discrimination | what is block pricing?
practice of charging different prices for different quantities or “blocks” of a good
What might be benefits of block pricing?
1.
2.
- leads to expanded output and greater scale economies, thus it can lead to increase in consumer welfare while allowing for greater profit to the company
- prices are reduced overall, but the savings from the lower unit cost still permits the company to increase its profit
What is third degree price discrimination?
What is the crucial criterion so that this can take place?
What would be an example?
- practice of dividing consumers into two or more groups with seperate demand curves and charging different prices to each group
- criterion: different demand because of different preferences
- example: student discounts as explicitly, return on flight tickets as implicitly
How does a firm decide what price to charge to what consumers in third degree price discrimination?
1.
2.
- total output should be divided between the groups so that MR for each group are equal (otherwise the firm would not maximize profit) || e.g. if MR for group A exceeds MR of group B, firm should lower price for group A and raise price for group B
- total output must be so that MR for each group is equal to Marginal cost of production (if not then firm should lower/ raise total output||e.g. if MR > Marginal costs, then greater profit can be done by increasing total output by lowering prices to groups _-> MR fall but still equal -> approaching MC
What is intertemporal price discrimination?
practice of seperating consumers with different demand functions into different groups by charging different prices at different points in time
What is peak load pricing?
practice of charging higher prices during peak periods when capacity constrains cause marginal costs to be high
What are characteristics of monopolies without discrimination?
- quantity
- price
- surplus?
- total welfare?
- considerably lower quantities supplied
- considerably higher uniform price possible
- higher producer and lower consumer surplus
- net welfare loss
What are characterisitcs of monolopies with discrimination?
- quantity
- prices
- surplus?
- welfare?
- less lower quantities supplied
- differing - high and low - prices
- even higher producer and even lower consumer surplus by capturing consumer surplus
- less net welfare loss
First degree price discrimination in practice |
- examples for individual price arrangements
- examples for price cuttings
- examples for price differences for identical homogeneous products
- price negotiations on bazars , price negotiations for artisan services (handwerklich)
- bargain offers in super markets , early bird discounts for tickets
- brand vs store bran products, boundary problem to third degree price discrimination
