Lecture 4 - Price Discrimination Flashcards
Perfect price discrimination (first degree).
If the firm is able to identify each individual customer’s willingness to pay. Some are willing to pay higher price than others for the same product. If the firm can find out what exactly the willingness to pay is for each individual then they can charge them perfectly for different customers.
Group price discrimination (third degree).
Firms cannot distinguish each individual customer but sometimes it is easier for firms to distinguish customers among different groups. For examples, discounted student prices. They charge cheaper prices to students for the same products compared to those who are not students.
Nonlinear pricing (second degree).
Implies some firms can be profitable by charging different prices for large purchased. If you buy more at one time then you can actually pay lower prices. If you buy a smaller amount you are probably going to pay the same level of price as before.
Two part pricing (second degree).
Charging customers a fee for the right to buy. For example, joining a club, you have to buy a membership fee then after you have joined you can buy the goods and services in the club by just a fixed cost or fixed price.
Tie in sales (second degree).
Requires customers to buy a second good or third good or services along with the first. For example, makeup bundles. They can buy a bundle at once with the first product they really want by paying jointly a higher price but for the each individual product inside the bundle they pay a lower price.
Firms sometimes use…
Nonuniform pricing where prices vary across customers, to earn a higher profit.
A firm engages in price discrimination by…
Charging consumers different prices for the same good.
What is price discrimination based on?
- Individual characteristics.
- Belonging to an identifiable sub-group of consumers.
- The quantity purchased.
What are the two reasons why a firm earns a higher profit from price discrimination than uniform pricing?
- Price-discriminating firms charge higher prices to customers who are willing to pay more than the uniform price.
- Price-discriminating firms sell to some people who are not willing to pay as much as the uniform price.
What are the necessary conditions for successful price discrimination?
- A firm must have market power (otherwise it cannot charge a price above the competitive price).
- Examples: monopolist, oligopolist, monopolistically competitive, cartel - A firm must be able to identify which consumers are willing to pay relatively more and there must be variation in consumers’ reservation price, the maximum amount someone is willing to pay.
- A firm must be able to prevent or limit resale from customers who are charged a relatively low price to those who are charged a relatively high price.
A firm’s inability to prevent resale is often the…
Biggest obstacle to successful price discrimination.
Resale is difficult or impossible for services when…
Transaction costs are high.
Examples: haircuts, students having to show their IDs in order to enjoy the discount. Without their ID, they cannot have the discount.
Not all differential pricing is…
Price discrimination.
It is not price discrimination if the…
Different prices simply reflect differences in costs.
For example, selling magazines at a newsstand for a higher price than via direct mailing. There are differences in costs and prices.
What is first degree/perfect price discrimination?
Each unit sold for each customer’s reservation price. Highest willingness to pay among customers.
