Price discrimination Flashcards
What is price discrimination? And when can Sellers use it
When a seller does not charge the same price for every unit sold.
How can they do this:
1. They have market power (ability to set prices)
2. Ability to sort/divide buyers based on price elasticity or WTP
3. Buyers can’t or are unlikely to resell the good
When can price discrimination occur with consumers?
It can occur
-between consumers(different consumers pay different prices)
- within consumers (individual customer oats different prices for different units)
- Amazon.ca can sell paper back different from amazon.com
How and why do producers set different prices?
They set different prices for different people cuz people are different and producers exploit the difference based on their interpretations of the demand curve.
How do producers charge consumers based on WTP?
They charge high for high WTP
They charge low for low WTP
What are the types of between consumer Price discrimination?
1st degree Price discrimination
2nd degree Price discrimination
3rd degree Price discrimination
What is 1st degree Price discrimination?
They go off the assumption that every buyer buys at most one item & that the WTP for each buyer is known.
What is the issue with 1st degree?
Perfect 1st degree is impossible cuz producers can’t truly know every consumers WTP and therefore cant set that right price for every consumer.
What is 2nd degree Price discrimination?
It creates a method where consumers can separate themselves in groups so a consumer that wants a lower price would have to overcome a hurdle:
- Willingness to take time collecting coupons
- waiting in line
- Eat @ 5
- Willing to accept an inferior version of the product
With 2nd degree what does price sensitivity have to do with those who get lower prices?
Those who want lower prices and are willing to overcome a hurdle are more price sensitive than those who are unwilling, who have more inelastic demand or higher WTP so they pay higher prices.
What is another form of 2nd degree?
Producers offering different bundles of your product with different quantities or characteristics. So buyers with higher WTP/more inelastic demand choose one version and Buyers with low WTP choose a different degraded version
What does 2nd degree look like?
Quantity Discounts & sometimes offering a lower quality version of the sam Elroy’s first even it if more costly to produce
What is 3rd degree Price discrimination?
Sorting customers into groups based on observable characteristics.
-Chosen characteristic group must be correlated w/ WTO & so a higher price for those w/ more inelastic demand and a low price for those with more elastic demand
What is the difference between 2nd degree and 3rd degree Price discrimination?
The difference is who the lowest price is available to:
If everyone, it’s 2nd degree
If not everyone, it’s 3rd degree
What is within-consumer price discrimination?
Since every consumer has the same downward sloping demand curve, price discrimination occurs an “effectively” different price per unit.
What are the types of within-consumer discrimination?
- Quantity Discounts
- Bundling
- Two-part tariffs
