Price Discrimination Flashcards
Define Price Discrimination
Practice of Charging different consumers different prices for the same product without Justification of Cost
How does Price Discrimination affect Consumer + Producer Surplus?
Reduces Consumer Surplus and Increases Producer Surplus
What is 3rd Degree P.D?
Charge different Broad Consumer Groups different Prices
-e.g. Students, Pensioners, Children etc.
What does 3rd degree P.D require to be Successful?
- Identifiable Consumer/Groups with different Willingness to pay for the Product
- Ability to prevent Resale- no Arbitrage between groups
- -> Otherwise Lower Price Group can buy and Sell to Higher Price consumer
If a Monopolist is selling 1 product to 2 Consumer groups, when MC = c, what is TC?
TC = c(Q1 + Q2)
What is the Profit Max. Function for 2 consumer Groups?
Prof. = P1(Q1)xQ1 + P2(Q2)xQ2 - c(Q1 + Q2) MR1 = MR2 = MC (=c)
What is 1st Degree P.D?
Monopolist knows Willingness to pay of each Individual Consumer
–> Can charge each Consumer a different Price
How does 1st Degree P.D affect Consumer + Producer Surplus?
Monopolist gains ALL Consumer Surplus
Under 1st Degree P.D, what Price is the Final unit sold at?
Final unit sold at MC (MC = MR)
- Efficient Price
- ->D = AR becomes New MR Curve
- -> MC = new MR
What does 1st Degree P.D prevent?
Prevents DWL to Society
What are the 2 parts to a 2-part Tariff?
- Fixed Component (f)
- Per Unit Component (P)
Under a 2-part Tariff, what is the Total Price paid by the Consumer?
T = f + PQ
Under a 2-part Tariff, what is the Average Price paid by the Consumer?
T/Q = (f/Q) + P
==> T/Q is Decreasing in Q
What does it mean that T/Q is Decreasing in Q?
The More units you buy- the Cheaper per unit the Product becomes
How does a 2-part Tariff affect the Monopolists Profits?
Increases Profits
- Generates Efficient Pricing + Maximises demand
How does a 2-part Tariff affect Consumer Gross + Net Surplus?
Consumers’ Gross Surplus- Increases
Net Surplus- Decreases
What is the Problem Consumer Sorting (2nd Degree) attempts to solve?
Consumers willing to pay a lot can pretend they don’t to be able to pay a Lower Price
How does Consumer Sorting solve the problem?
Offer a ‘menu’ of Choices that consumers will pick depending on their own characteristics
How does a 2-part Tariff sort Consumers?
Consumers willing to pay a lot–> Pay a High f + a Low P
What is Versioning?
Offering different packages/versions of the Same Product
- -Can sort Consumers based on Unobservable Characteristics
- e.g. Hardback + Paperback books
What is Bundling?
Bundle multiple products together
- e.g. Microsoft Office Bundle- Cheaper to buy Bundle than Separately
- Opens access to variety of Consumer types
