Chapter 6 - Price Discrimination Flashcards
price discrimination
the practice of setting different prices for the same good depending on quantity purchased, on the buyer’s characteristics or on various sale clauses
goal of price discrimination
goal of price discrimination is for the seller to make the most profit possible and to capture the market’s consumer surplus and generate the most revenue possible for a good sold
customer markets
markets where the sale terms are tailored to each individual customer
customer markets
markets where the sale terms are tailored to each individual customer
perfect price discrimination
seller has perfect information about each buyer’s valuation and is able to set a different price to each buyer.
optimal policy is to sell at a price equal to the willingness to pay by each customer
resale possibility
when segmenting a market and setting different prices to different segments, one must beware of the possibility of resale (arbitrage opportunity)
price discrimination allows the seller to create additional consumer surplus and capture existing consumer surplus. Its success requires that…
…resale be expensive or impossible
first degree price discrimination
perfect price discrimination
a firm sellls each unit at the maximum amount any customer is willing to pay for it (auction)
second degree price discrimination
price depends on the quantity purchased
third degree price discrimination
different prices are set in different markets (grous)
market segmentation
selection by indicators, seller divides buyers into groups, setting a different price for each group
Elasticity rule
under discrimination by market segmentation, a seller should charge a lower price in those market segments with greater price elasticity
home bias
demand elasticities tend to be lower in the domestic market
domestic goods are more highly valued than foreign goods
limits of the market segmentation
- elasticities in each submarket will be very similar to that of the neighbour submarket and you will not get much out of segmentation
- elasticities vary a lot across neighbour segments and there will be a resale or arbitrage problems
self selection
the seller indirectly sorts consumers by offering different deals or packages which consumers will choose and self-select according to the group they belong to
versioning
selling several versions of the same product at different prices with different quality or characteristics
high-end consumers buy high-end products and the other way around
damaged goods
extreme form of versioning
firms reduce the quality of some of their products in order to price discriminate
incentive constraint
way to make sure a high-end consumer has no incentive to go for the deal that is intended for the low-end consumer
participation constraint
when the price cannot be greater than the low-end consumer’s willingness to pay
information surplus
the surplus achieved by having information about high-end consumers, and therefore being able to offer the high type
bundling or tie-in sales
groups of products that are sold together
pure bundling = buyers must purchase the bundle or nothing
mixed bundling = consumers are offered the choice between purchasing the bundle or one of the separate parts
durable goods
can wait to be bought if their future price is expected to change
when selling a durable good, sellers may prefer to commit not to price discriminate over time. In fact, due to “strategic” purchase delays, profits may be lower under price discrimination
high-value buyers will wait for prices to lower and therefore profits will decrease
coase conjecture
the waiting game may unravel to the point that the seller is forced to lower prices from the very beginning
non-linear pricing
second degree price discrimination
consists in charging a lower price when buying a second unit
two-part tariff
fixed part, which each consumer must pay regardless of quantity purchased and a variable part proportional to the quantity purchased
if the seller can set a two-part tariff and all consumers have identical demands, then the (variable) price that maximises total profits is the same that maximises total surplus, that is a price equal to (1). Total efficiency (2) but consumer welfare (3) as a result of a nonlinear pricing
- marginal cost
- increases
- decreases
a monopolist’s optimal two-part tariff consists of a positive fixed fee and a variable fee that is (1) than monopoly price. Total surplus is therefore (2) than under uniform pricing
- lower
2. greater
ascending price auction (English auction)
start at a low price, ask for higher bids and continue until no bidder wants to outbid the highest extant bid
descending aution (Dutch)
start with a high price and then gradually decrease it until a bidder makes a sign
first-price auction
requires bidders to submit a sealed bid. The highest bid is then selected, and the bidder pays the amount specified in the bid
second-price auction
bidders submit sealed bids, the highest bid wins but the price paid by the winning bidder is the second highest bid
winner’s curse
an outcome in which the winner prevails by submitting a bid that is not only higher than competing bids, but also higher than the true value of the item
discriminatory auction
multiple homogeneous products are sold at different prices
uniform price auction
a multiunit auction in which a fixed number of identical units of a homogenous commodity are sold for the same price
simultaneously ascending auction
in each round, bidders are allowed to submit bids for each project on the block. each new bid must be higher than the previous highest bid plus a minimum increment
welfare in price discrimination
total welfare is greater under price discrimination
consumer surplus is lower under price discrimination (=0)
more consumers are served under price discrimination
it may happen that total efficiency decreases as a result of price discrimination
for example if perfect price discrimination is costly, it may be that the gains for the seller do not compensate the losses imposed on consumers
prospect theory
consumers like paying a lower price than others, but much more than that they dislike paying a higher price than others
Laws against price discrimination (to some extent)
Robinson-Patman Act
Article 102 forbidding the abuse of dominant position
