Chapter 12 (Week 7) Flashcards
Price discrimination
charging consumers different prices for the same good based on individual consumer characteristics, membership in an identifiable subgroup of consumers , or the quantity consumers purchase
Why price discrimination pays
Some consumers are willing to pay more than others
A price discriminating firm that varies its prices across customers is able to get more customers and higher profits
Charges a higher price to consumers willing to pay more than uniform price
Sells to some people who are unwilling to pay as much as the uniform price
Which firms can price discriminate
A firm must have market power - as without it they can’t charge any consumer more than the
Groups of consumers or individual consumers must have demand curves that differ and the firm must be able to identify how they differ
A firm must be able to prevent or limit resale → usually the biggest obstacle to prime discrimination
Preventing resale
Resale is difficult for most services and when transaction costs are high → some firms try to raise transaction costs
Vertically integrating - participating in more than one successive stage of the production and distribution chain for a good or service
Types of price discrimination
Perfect price discrimination (first degree): a firm sells each unit at the maximum amount any customer is willing to pay for it
Non linear price discrimination (second degree): price varies with quantity purchased
Perfect price discrimination
Firm charges people their reservation price: the maximum amount a person would be willing to pay for a unit of output
The firm captures all possible consumer surplus
Sells each unit to the customer who values it the most at the maximum price that person is willing to pay
Most efficient type of price discrimination
Perfect price discrimination costs and benefits
It maximises the sum of consumer and producer surplus
But the entire consumer surplus goes to the firm
Perfect price discrimination is more efficient than a single-price monopoly because it produces more output.
Group price discrimination
A firm engages in group price discrimination by dividing potential customers into two or more groups and setting different prices for each group
Identifying groups
Identify and divide consumers based on their actions → firm allows consumers to self-select the group to which they belong
Divide buyers into groups based on consumer’s observable characteristics that the firm believes are associated with relatively high or low price elasticities
Welfare effects of group price discrimination
Results in inefficient production and consumption → welfare is lower than under competition or perfect price discrimination
Non linear price discrimination
a firm can price discriminate by letting the price each customer pays vary with the quantity the customer buys
Each customer faces the same nonlinear pricing schedule
