Price discrimination Flashcards
Why don’t monopolies lose most of their customers if they increase prices?
They have more complex pricing and marketing strategies at their disposal as they hold some sort of market power, than competitive firms. They can also try to differentiate their product from other firm in their market.
What happens when competitive firms increase their prices?
They lose most of their customers
What is uniform pricing?
When all units of a good are sold at a constant price regardless of the quantity or customer.
What is 1st degree price discrimination?
Each output unit is sold at a different price. Prices may differ across buyers. For example automobile sales and haggling at a market.
What is second degree price discrimination?
When unit per output is sold are a different price to different customers but customers who buy the same quantity pay the same price. e.g. Quantity premia and discounts
What is third degree price discrimination?
Price per unit within buyer group is constant but prices differ across buyer groups. E,g student discount/ senior citizen discounts vs middle aged people.
Outline 1st degree price discrimination.
- also know as perfect discrimination
- Involves the supplier knowing the highest valuation of his product and then the next highest and so forth.
- This, unlike monopoly under uniform pricing is pareto efficient.- there are no more gains to be made, consumer cannot buy one more good without harming the producer (they have to produce where extra output does not cover the additional cost)
- The supplier sells goods according to the demand schedule up until where MC=Y instead of mC=mR which :
1. gets rid of DWL
2. gets rid of consumer surplus (as all the customers willing to ay a higher price have done so…”
3. Allows producer surplus to= the maximum surplus possible. (The producer is willing to produce at a lower price but doesn’t…)
Define producer surplus.
The difference between mc and Y. Remember the producer CAN produce at mC which is proven as market equilibrium is where output equals marginal cost. Also defined as the difference between the price the supplier sells a good and the price the supplier was willing to sell it at.
Define consumer surplus.
The saving caused by the difference between a customer valuation of a product and the price it is bought for.
Give an example of 1st degree price discrimination.
- automobile traders
- market traders
Outline 2nd degree price discrimination.
- known as non linear price discrimination
- price per unit varies with quantity because things like discounts or premia on larger amounts of goods change price per unit.
- however customers who buy the same quantity pay the same price
Give an example of second degree price discrimination
- Bulk buying discounts
- Three for two offers
- bogof
- buy one get one half price
What is the profit maximising condition in 3rd degree discrimination?
mR(y1)=mc=mR(y2)
although there are two different priced goods they are still the same so the marginal cost for producing them is the same.
recall that profit is maximised graphically at the point of inflection on a profit graph. at this point dΠ(y)=0
also recall that Π=total revenue- total cost
so
dΠ(y1)=dp1(y1)y1/dy1 - dc(y1+y2)/d(y1+y2)=0
and
dΠ(y1)=dp2(y2)y2/dy2 - dc(y1+y2)/d(y1+y2)=0
Which market (discount or normal buyer) is more price elastic and what is the effect of this?
The normal buyer is more insensitive to price changes so prices and output will be higher in this market. recall that p=MC/1-ε.
