Micro - Price Discrimination

Question 1

For price discrimination, what type of firm do we consider

Answer 1

Monopolist

Question 2

What is 1st degree price discrimination

Answer 2

Charging each consumer a different price, at their willingness to pay. Often unfeasible. Seller is said to March down demand curve
Allows the firm to capture all available consumer surplus for itself.
Requires perfect information on consumer WTP

Question 3

2 part Tarik is an alternative but equivalent strategy for 1PD, what is taken as the price and fixed fee for entry (for right to purchase)

Answer 3

p = MC and F = CS (consumer surplus)

Question 4

What is 3rd degree price discrimination

Answer 4

Charging different prices to different groups of consumers

Question 5

Who gets lowest price under 3PD

Answer 5

Group with most elastic demand

Question 6

How to calculate CS

Answer 6

Area of triangle on graph above the price line and below the demand curve

Question 7

What’s 2nd degree price discrimination

Answer 7

Each customer pays own price, depending on differing characteristics of purchase eg first class/economy ticket, number bought/quantity discounts

Question 8

What are the conditions for choosing prices for different categories (eg first/second class tickets) for 2nd degree price discrimination?

Answer 8

The firm doesn’t know the type of customer (eg business/tourist traveler):

Utility - price for target demographic must be the greatest

Total utility - price for consumers consuming their designated type must be positive so that they do consume.

Question 9

How to maximise profits with 2PD

Answer 9

Charge the max price subject to the constraints

Question 10

What’s pure bundling

Answer 10

The goods are only available in the bundle

Question 11

What is mixed bundling

Answer 11

Goods are available in the bundle and also available to buy individually

Question 12

What’s a tie-in sale

Answer 12

Firm sells two complimentary goods where ownership of one of the goods is necessary for consumption of the other.

Question 13

What is being negatively correlated when it comes to bundling

Answer 13

Having one company better for each option. Ie not negatively correlated means that one company is better for both items.

Question 14

When does non-linear pricing occur

Answer 14

when a consumer’s total expenditure on an item

does not rise linearly (proportionally) with the amount purchased

Question 15

What are the two constraints the monopolist defaces in the two-type case (can offer two things)

Answer 15

The individual rationality constraint: total utility - cost must be positive to each type of consumer

The incentive compatibility constraint: consumers of a certain type prefer the option designed for them rather ran an option designed for another type

Question 16

How t9 find which constraints are slack and can thus be ignored for the remaining binding constraints

Answer 16

Use the fact that one of the theta values for the diffent types will be greater than the other to get rid of one of individual rationality constraints. The incentive comparability wrt the other type is the one that is slack.

For more than 2 types, the smallest theta value shows the IR constraint that is binding, then all the other type’s ICs are binding

Question 17

Effect of 1PD on monopolist and consumers

Answer 17

monopolist gets higher profits, consumers pay more

Question 18

Effect of 3PD on monopolists and consumers

Answer 18

monopolist gets higher profits, consumers might be better off