Ch 13 Direct Price Discrimination

Question 1

price discrimination uses

Answer 1

profitably designing and implementing price discrimination schemes, in which sellers charge different prices to different consumers, not on the basis of differences in costs but, rather, on the differences in consumer demand.

Question 2

motivation for price discrimination

Answer 2

it allows a firm to sell items to low-value customers who otherwise would not purchase because the price is too high.

Question 3

price discrimination is the practice of

Answer 3

charging different prices to different buyers or groups of buyers based on differences in demand.

Question 4

For products with relatively low marginal costs or with less-elastic demand, like software, music, or pharmaceutical drugs

Answer 4

the gap between price and marginal cost is largest.

For these products, price discrimination is most profitable because there are more consumers whose values are above the marginal cost of production but below the profit-maximizing price.

Question 5

Charging lower prices to low-value consumers also means

Answer 5

that you charge high-value customers higher prices.

ex: drugs sold at different prices than other countries

Question 6

if we allow drug reimportation,

Answer 6

profits of U.S. drug manufacturers would fall, and foreign buyers would face higher prices.

Question 7

Price discrimination

a. results in all consumers paying higher prices.	
b. reduces the total quantity sold.	
c. allows firms to profitably serve some low-value consumers.	
d. None of the above

Answer 7

c. allows firms to profitably serve some low-value consumers.

Question 8

The zoo knows that senior citizens all value tickets at $20 or less, and younger visitors all value tickets at $30 or more. Marginal costs are zero. The optimal prices for full-price tickets and senior citizen tickets are:

a. $30 and $10	
b. $40 and $10	
c. $50 and $20	
d. $40 and $20

Answer 8

b. $40 and $10

Question 9

direct price discrimination

Answer 9

a price discrimination scheme in which we can identify members of the low-value group, charge them a lower price, and prevent them from reselling their lower priced goods to the higher value group.

• identify different customer groups with different elasticities.
• you set an optimal price for each group
• charge a lower price to the group with the more-elastic demand, and
• a higher price to the group with the less-elastic demand

Question 10

Under indirect price discrimination,

Answer 10

we cannot perfectly identify the two groups or cannot prevent arbitrage, so we must find indirect methods of setting different prices to the two different groups.

Question 11

once you implement price discrimination

Answer 11

create incentive for members of the low elasticity group to try to purchase at the lower prices offered to the high elasticity group

if too many customers do this then price discrimination becomes unprofitable

Question 12

marginal cost of two groups can be different

Answer 12

but as long as price elasticities differ, pricing is still going to be determined

Question 13

Successful direct price discrimination requires

a. identifying members of a low-value segment of customers.	
b. setting different prices to different segments based on their demand elasticities.	
c. preventing arbitrage or resale between segments.	
d. All of the above

Answer 13

d. All of the above

Question 14

if a firm offers an array of different prices to consumers,

Answer 14

it consummates more transactions and thus creates more wealth

Question 15

if it charges prices closer to what consumers are willing to pay for a good,

Answer 15

it reduces consumer surplus (the difference between what consumers are willing to pay and what they have to pay).

Question 16

robinson-patman act

Answer 16

part of a group of laws collectively called the antitrust laws governing competition in the United States. Under the Robinson–Patman Act, it’s illegal to give or receive a price discount on a good sold to another business. This law does not cover services and sales to final consumers.

Question 17

There are two ways to defend yourself from a Robinson-Patman lawsuit

Answer 17

you can claim that the price discount was cost-justified or that the price discount was given to meet the competition.

Question 18

to comply with antitrust laws you

Answer 18

Charge all customers the same price, unless the cost of serving them varies. But feel free to cut price to any customer to meet the lower price of a competitor

Question 19

Robinson-Patman Act discourages discounting. If companies have to offer the same price to every customer,

Answer 19

they are less likely to reduce price to their most price-elastic customers.

Question 20

When selling goods to businesses, which of the following does not run afoul of antitrust laws?

a. Charge different prices to groups of businesses if groups have different elasticities of demand.	
b. Charge different prices to groups of businesses if you have different costs of serving each group.	
c. Charge each business no more than it is willing to pay.	
d. None of the above run afoul of antitrust laws.

Answer 20

b. Charge different prices to groups of businesses if you have different costs of serving each group.

Question 21

Which of the following can undermine efforts to price discriminate?

a. Consumers with less elastic demand may try to resell to consumers with more elastic demand.	
b. Consumers may refuse to buy if they discover that others are paying a lower price.	
c. Different segments of consumers may have different elasticities of demand.	
d. It is easy to identify whether consumers have relatively high or low demand elasticity.

Answer 21

b. Consumers may refuse to buy if they discover that others are paying a lower price.

Question 22

arbitrage

Answer 22

can defeat a price discrimination scheme if enough of those who purchase at low prices resell to high-value consumers. This can force a seller to go back to a uniform price.

Question 23

All of the following are examples of price discrimination except

a. Charging more for hardcover books than paperback books because the cost of producing hardcover books is higher.	
b. Charging less for matinee movies than evening movies because matinee movie goers are more price sensitive.	
c. Offering financial aid for a summer camp because wealthier parents are able and willing to pay more than poorer parents.	
d. Offering student discounts at a restaurant because students are more likely to eat at home if restaurant prices are high than are non-students.

Answer 23

a. Charging more for hardcover books than paperback books because the cost of producing hardcover books is higher.

Question 24

What is the difference between direct price discrimination and indirect price discrimination?

a. Direct price discrimination sets different prices to different groups of customers, while indirect price discrimination sets the same price to all groups.	
b. Direct price discrimination always hurts consumers while indirect price discrimination can benefit some consumers.	
c. Under direct price discrimination, low-value consumers can be identified by the firm, while under indirect price discrimination, they cannot be identified.	
d. Under direct price discrimination, firms need not worry about arbitrage, but under indirect price discrimination, arbitrage is a concern.

Answer 24

c. Under direct price discrimination, low-value consumers can be identified by the firm, while under indirect price discrimination, they cannot be identified.

Question 25

Which of the following can undermine attempts to price discriminate?

a. Arbitrage between consumers paying different prices.	
b. Antitrust laws precluding some types of price discrimination.	
c. Consumer rebellion to paying a higher price than other consumers.	
d. All of the above

Answer 25

d. All of the above.

Question 26

A movie theater is showing two different movies: a Hollywood blockbuster (with 100 customers willing to pay $10 for a ticket, and 100 willing to pay $8) and an independent film that attracts 50 film buffs, willing to pay $20 each. Marginal cost is zero and neither movie can fill theater capacity. What is the theater’s maxim profit if it cannot price discriminate (it must charge the same price for both movies) and if it can price discriminate (it may charge different prices for different movies)?

a. $2,000 ; $2,600	
b. $1,600 ; $2,600	
c. $1,500 ; $2,100	
    d. $1,500 ; $2,000

Answer 26

a. $2,000 ; $2,600

Question 27

A movie theater is showing two different movies: a Hollywood blockbuster (with 100 customers willing to pay $10 for a ticket, and 100 willing to pay $8) and an independent film that attracts 300 film buffs, willing to pay $20 each. Marginal cost is zero and neither movie can fill theater capacity. What is the theater’s maxim profit if it cannot price discriminate (it must charge the same price for both movies) and if it can price discriminate (it may charge different prices for different movies)?

a. $4,000 ; $10,000	
b. $4,000 ; $5,600	
c. $6,000 ; $7,000	
d. $6,000 ; $7,600

Answer 27

d. $6,000 ; $7,600