Chapter 6 - Price Discrimination

Question 1

price discrimination

Answer 1

the practice of setting different prices for the same good depending on quantity purchased, on the buyer’s characteristics or on various sale clauses

Question 2

goal of price discrimination

Answer 2

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

Question 3

customer markets

Answer 3

markets where the sale terms are tailored to each individual customer

Question 4

customer markets

Answer 4

markets where the sale terms are tailored to each individual customer

Question 5

perfect price discrimination

Answer 5

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

Question 6

resale possibility

Answer 6

when segmenting a market and setting different prices to different segments, one must beware of the possibility of resale (arbitrage opportunity)

Question 7

price discrimination allows the seller to create additional consumer surplus and capture existing consumer surplus. Its success requires that…

Answer 7

…resale be expensive or impossible

Question 8

first degree price discrimination

Answer 8

perfect price discrimination

a firm sellls each unit at the maximum amount any customer is willing to pay for it (auction)

Question 9

second degree price discrimination

Answer 9

price depends on the quantity purchased

Question 10

third degree price discrimination

Answer 10

different prices are set in different markets (grous)

Question 11

market segmentation

Answer 11

selection by indicators, seller divides buyers into groups, setting a different price for each group

Question 12

Elasticity rule

Answer 12

under discrimination by market segmentation, a seller should charge a lower price in those market segments with greater price elasticity

Question 13

home bias

Answer 13

demand elasticities tend to be lower in the domestic market

domestic goods are more highly valued than foreign goods

Question 14

limits of the market segmentation

Answer 14

1. elasticities in each submarket will be very similar to that of the neighbour submarket and you will not get much out of segmentation
2. elasticities vary a lot across neighbour segments and there will be a resale or arbitrage problems

Question 15

self selection

Answer 15

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

Question 16

versioning

Answer 16

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

Question 17

damaged goods

Answer 17

extreme form of versioning

firms reduce the quality of some of their products in order to price discriminate

Question 18

incentive constraint

Answer 18

way to make sure a high-end consumer has no incentive to go for the deal that is intended for the low-end consumer

Question 19

participation constraint

Answer 19

when the price cannot be greater than the low-end consumer’s willingness to pay

Question 20

information surplus

Answer 20

the surplus achieved by having information about high-end consumers, and therefore being able to offer the high type

Question 21

bundling or tie-in sales

Answer 21

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

Question 22

durable goods

Answer 22

can wait to be bought if their future price is expected to change

Question 23

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

Answer 23

high-value buyers will wait for prices to lower and therefore profits will decrease

Question 24

coase conjecture

Answer 24

the waiting game may unravel to the point that the seller is forced to lower prices from the very beginning

Question 25

non-linear pricing

Answer 25

second degree price discrimination

consists in charging a lower price when buying a second unit

Question 26

two-part tariff

Answer 26

fixed part, which each consumer must pay regardless of quantity purchased and a variable part proportional to the quantity purchased

Question 27

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

Answer 27

1. marginal cost
2. increases
3. decreases

Question 28

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

Answer 28

1. lower

2. greater

Question 29

ascending price auction (English auction)

Answer 29

start at a low price, ask for higher bids and continue until no bidder wants to outbid the highest extant bid

Question 30

descending aution (Dutch)

Answer 30

start with a high price and then gradually decrease it until a bidder makes a sign

Question 31

first-price auction

Answer 31

requires bidders to submit a sealed bid. The highest bid is then selected, and the bidder pays the amount specified in the bid

Question 32

second-price auction

Answer 32

bidders submit sealed bids, the highest bid wins but the price paid by the winning bidder is the second highest bid

Question 33

winner’s curse

Answer 33

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

Question 34

discriminatory auction

Answer 34

multiple homogeneous products are sold at different prices

Question 35

uniform price auction

Answer 35

a multiunit auction in which a fixed number of identical units of a homogenous commodity are sold for the same price

Question 36

simultaneously ascending auction

Answer 36

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

Question 37

welfare in price discrimination

Answer 37

total welfare is greater under price discrimination
consumer surplus is lower under price discrimination (=0)
more consumers are served under price discrimination

Question 38

it may happen that total efficiency decreases as a result of price discrimination

Answer 38

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

Question 39

prospect theory

Answer 39

consumers like paying a lower price than others, but much more than that they dislike paying a higher price than others

Question 40

Laws against price discrimination (to some extent)

Answer 40

Robinson-Patman Act

Article 102 forbidding the abuse of dominant position