L5: Price Discrimination

Question 1

price discrimination

Answer 1

charging different prices for the same good
- form of non-linear pricing

idea to charge higher prices when consumers have higher valuations

Question 2

why would firms want to price discriminate?

Answer 2

to transform consumer surplus and deadweight loss into producer surplus through price discrimination

monopolist will be better off

Question 3

conditions for price discrimination

Answer 3

market power
- price-taker cannot set price for products

firms have to be able to identify high WTP consumers

firms can prevent resale or else consumers work around discrimination

Question 4

types of price discrimination

Answer 4

first degree
- firm identifies each individual and observes WTP
- every consumer is offered a different price

second degree
- firms unable to identify individuals or groups
- firm offers a menu of price schedules and consumers self-select

third degree
- firm cannot identify individuals but identifies groups with different demand
- price discrimination according to different groups/characteristics

Question 5

efficiency in first-degree price discrimination

Answer 5

outcome is socially efficient
- every consumer willing to pay > MC gets the product
- quantities are the same as quantities under perfect competition with no DWL

distribution is not fair but still efficient
- issue is that all the consumer surplus disappears
- socially efficient in an aggregate welfare measure but all consumer surplus goes to the producer

Question 6

two-part tariff

Answer 6

fixed fee A and variable fee p per unit

Question 7

optimal two-part tariff with homogenous consumers

Answer 7

p* = c

firms can set A to be as large as consumer surplus

Question 8

optimal two-part tariff with heterogeneous consumers

Answer 8

p* = c

firms now set Ai = CSi to match cnosumer surplus of each consumer
- demand for each consumer is different

Question 9

Consumer Information and Discrimination: Does the Internet Affect the Pricing of New Cars to Women and Minorities? Morton, Zettlemeyer and Silva-Risso, 2003

Answer 9

bargaining as important in the car dealing industry

minorities pay higher prices and this can be explained by income, education, search costs, area, etc. but 35% difference in prices still not explained by these factors

price that people end up paying in dealerships changes with demographics

Question 10

third degree price discrimination

Answer 10

discrete version of first degree price discrimination
- firm cannot observe individual WTP but can relate average differences in WTP to observable attributes
- segmenting the market based on observable characteristics

MR is equal across segments but not prices
- price as a function of elasticity of the two groups at the point of the demand curve
- charging higher prices to less elastic consumers