Price Discrimination Flashcards
A firm engages in price discrimination if..?
If it charges consumers different prices for the same good
Three types of price discrimination?
1st degree price discrimination - each unit sold for each customer’s reservation price
3rd degree price discrimination - firm charges different groups of customers different prices
Why do firms price discriminate?
It increases profits.
They can charge higher prices to customers willing to pay more than uniform monopoly price.
They can sell to people not willing to pay as much
3 conditions of price discrimination
- Firm must have market power (or it can’t charge a price above the competitive price)
- Variation in consumer’s reservation prices & must be able to identify PED
- Must be able to prevent resale
Under first degree price discrimination…
The firm charges each consumer a price exactly equal to maximum they are willing to pay 💰
So each consumer gets 0 consumer surplus.
All consumer surplus thst would exist in competitive market is transferred to the firm.
Draw a first and third degree discrimination graph
Both perfect competition and _____ are _______
Perfect competition and monopoly with 1st degree price discrimination are efficient (maximise welfare)
1st degree PD monopolist means what for welfsre loss?
Welfare loss = 0
Why is 1st degree PD rare?
Firms don’t have perfect information about their customers.
Costly to gather good consumer data but getting easier due to advances in consumer technology.
Some real world examples close to perfect PD (Suez Canal, Google ADS)
Most efficient form of PD?
First degree
If monopolists divide its customers into 2 groups, its profit maximisation problem is:
maxπ(Q1,Q2) = R1(Q1)+ R2(Q2) - C(Q1+Q2)
(Again assuming monopolist chooses quantities)
Monopolist charges group 1 higher price if…
PED1 > PED2
I.e. if demand of group 1 is less elastic (closer to 0)
What does efficiency mean?
efficiency means allocating resources to maximize overall welfare/satisfaction (allocative efficiency) and producing goods at the lowest possible cost (productive efficiency).
