CHAPTER 11 Flashcards
Define Price discrimination
Increasing profit by selling the same good at different prices to different consumers for reasons unrelated to cost
4 conditions for price discrimination
- firms must have some degree of market power
- different elasticities of demand or different willingness/ability to pay
- must be able to identify these different elasticities and be able to charge accordingly
- no resale by consumers possible
three types of price discrimination
Perfect price discrimination, hurdle method, group pricing
Define perfect price discrimination
occurs when buyers pay their “reservation price”, car mechanic, very rare, occurs through asymmetric information
Define hurdle method
consumer self-select themselves as having particular elasticity of demand, much more common, aeroplane tickets, phone plans
Define group pricing
seller can segment the market into groups (with different elasticities or willingness to pay) and identify who belongs to which segment, movie tickets and student pricing
Welfare and efficiency of price discrimination
good for firms, bad for buyers, however, all buyers won’t lose, allowing accessibility into the market → more equitability?
Game theory
science of strategic interaction, used to understand rational and optimal behaviours
Nash-equilibrium
one inevitable outcome, the option that is each players highest outcome given their opponents action
Prisoners Dilemma
even if it is best for two firms not to make a certain business choice, if one does and the other doesn’t, the player who runs it captures valuable scales
Beach location game
one long beach, both firm coming closer and closer to the middle, until in the middle = equilibrium
Burn the boats
forcibly removing options available to the other side with hope of pay-off
